[Federal Register Volume 63, Number 228 (Friday, November 27, 1998)]
[Notices]
[Pages 65630-65633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31583]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40685; File No. SR-Phlx-98-48]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Philadelphia Stock
Exchange, Inc. Relating to Listing and Trading Options on The
Street.com Internet Index
November 17, 1998.
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 October 23, 1998, 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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change for interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\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 Phlx proposes to list and trade European-style, cash-settled
options on The Street.com Internet Index (``Index''),\3\ an equal
dollar-weighted, A.M.-settled, narrow-based index of 20 small to mid-
size companies by capitalization that are involved in Internet
software, computer data security, and consulting services.\4\ The Phlx
is filing this proposal pursuant to Phlx Rule 1009(A), which provides
for the commencement of trading of options on the Index 30 days after
the date of the filing. The Phlx believes that this proposal is in
compliance with Phlx Rule 1009(A) and the standards approved in the
Generic Index Option Approval Order (``Generic Index Approval
Order'').\5\
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\3\ The Phlx pre-filed the Index with the Commission in August
1998. The pre-filing was submitted in accordance with the Generic
Index Approval Order, infra note 5. Subsequent to the pre-filing,
the Exchange renamed the Phlx Internet Growth Index as The
Street.com Internet Index. The Street.com, Inc. does not guaranty
the accuracy or completeness of the Index, makes no express or
implied warranties with respect to the Index and shall have no
liability for any damages, claims, losses or expenses caused by
errors in the Index calculation. The Exchange represents that it
will have sole discretion over the calculation of the Index.
\4\ Since the pre-filing, the Phlx represented to the Commission
that nothing has changed with the Index, including the stocks
selected for the Index; only the name of the Index was changed.
Telephone conversation between Nandita Yagnik, Counsel, Phlx, and
Joseph Corcoran, Division of Market Regulation, Commission on
November 12, 1998.
\5\ See Securities Exchange Act Relese No. 34157 (June 3, 1994),
59 FR 30062 (June 9, 1994) (order approving File Nos. SR-Amex-92-35;
SR-CBOE-93-59; SR-NYSE-94-17; SR-PSE-94-07; and SR-Phlx-94-10). The
Generic Index Approval Order established generic listing standards
for options on narrow-based indexes and adopted streamlined
procedures for introducing trading in options satisfying the generic
listing standards.
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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 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 IV below. The Exchange 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
1. Purpose
The purpose of the proposal is to list for trading European style,
cash-settled options on The Street.com Internet Index, a new index
developed by the Exchange pursuant to Phlx Rule 1009A(b) in accordance
with the Generic Index Approval Order for the listing and trading of
narrow-based index options. Options on The Street.com Internet Index
will provide an important hedging vehicle for basket traders who engage
in trading securities that comprise this subsector of the computer
industry.
The following is a more detailed description of the proposed Index
options:
Ticker Symbol: DOT
Settlement Value Symbol: DOS
Underlying Index: The Street.com Internet Index is an equal dollar-
weighted index composed of 20 stocks involved in Internet software,
computer data security, and counsulting services that are traded on the
New York Stock Exchange (``NYSE'') and Nasdaq Stock Market
(``Nasdaq''), and are therefore, reported securities as defined in Rule
``11Aa3-1 under the Act. Further, all of the stocks presently meet the
Exchange's listing criteria for equity options contained in Exchange
Rule 1009 and are currently the subject of
[[Page 65631]]
listed options on U.S. options exchanges.
The Exchange notes that all of the companies represented in the
Index are U.S. companies. However, if non-U.S. companies are added to
the Index (such as American Depository Receipts) that are not subject
to comprehensive surveillance sharing agreements, those components will
not account for more than 20% of the weight of the Index.
As of September 30, 1998, the market capitalization of all the
stocks in the Index exceeded $50 billion, with individual
capitalizations ranging from $167 million to $24 billion. All 20
component issues in the Index had monthly trading volumes in excess of
one million shares over each of the months from April through
September.
Index Calculation: The methodology used to calculate the Index is
an equal dollar-weighted method, meaning that each of the component
stocks is represented in the Index in approximately equal dollar
amounts. The Exchange believes that this method of calculation is
important because it will provide each component issue with equivalent
influence on the movement of the Index value instead of allowing one
highly capitalized stock to dominate the movement of the Index. To
determine the initial dollar weighting of the stocks, the Exchange
calculated the number of shares of each that would represent an
investment of approximately $10,000 in each of those stocks comprising
the Index based on closing prices on September 30, 1998. The value of
the Index equals the current market value of the sum of the assigned
number of shares of all of the stocks in the Index divided by the
current Index divisor. The Index divisor was set to yield an initial
Index value of 200 at the opening on October 1, 1998.
Index Maintenance: To maintain the continuity of the Index, the
divisor will be adjusted to reflect nonmarket changes in the price of
the component securities as well as changes in the composition of the
Index. Changes which may result in divisor adjustments include but are
not limited to stock splits, dividends, spin-offs, mergers and
acquisitions. In accordance with Phlx Rule 1009A, if any change in the
nature of any component (e.g., delisting, merger, acquisition or
otherwise) in the Index will change the overall market character of the
Index, the Exchange will take appropriate steps to remove the stock or
replace it with another stock that the Exchange believes would be
compatible with the intended market character of the Index. Any
replacement components will be reported securities as defined in Rule
11Aa3-1 under the Act.
Currently, the Index is comprised of 20 component stocks. Absent
Commission approval, the Exchange will not change the number of
components to more than 24 or fewer than 16. The Exchange notes that
the component stocks comprising the top 90% of the Index, by weight,
will each maintain a minimum market capitalization of $75 million. The
remaining 10%, by weight, will each maintain a minimum market
capitalization of $50 million. The component stocks comprising the top
90% of the Index, by weight, will maintain a trading volume of at least
500,000 shares per month. The trading volume for each of the component
stocks constituting the bottom 10% of the Index, by weight, will
maintain at least 400,000 shares per month. No fewer than 90% of the
component issues by weight or fewer than 80% of the total number of the
components qualify as stocks eligible for options trading.
If the Index fails at any time to satisfy one or more of the
required maintenance criteria, the Exchange will notify the Commission
staff immediately and will not open for trading any additional series
of options on the Index, unless the above is determined by the Exchange
not to be significant and the Commission concurs in that determination,
or unless the continued listing of options on The Street.com Internet
Index has been approved by the Commission under Section 19(b)(2) of the
Act.\6\ In addition to not opening for trading any additional series,
the Exchange may, in consultation with the Commission, prohibit opening
purchase transactions in series of options previously opened for
trading to the extent that the Exchange deems such action necessary or
appropriate.\7\
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\6\ See Phlx Rule 1009A.
\7\ See Phlx Rule 1010.
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In addition to the maintenance criteria above, no single component
of the Index shall account for more than 25% of the Index and the three
highest weighted component securities shall not account for more than
60% of the Index. If the Index fails to satisfy the maintenance listing
standards set forth above, the Exchange shall not open for trading any
additional series of options of that class unless such failure is
determined by the Exchange not to be significant and the Commission
concurs in that determination, or unless the continued listing of that
class of Index options has been approved by the Commission under
Section 19(b)(2) of the Act.
Rebalancing: Following the close of trading on the third Friday of
January, April, July and October the Index portfolio will be adjusted
by changing the number of whole shares of each component so that each
company is gains represented in ``equal'' dollar amounts. If necessary,
a divisor adjustment will be made at the rebalancing to ensure the
continuity of the Index's value. The newly adjusted portfolio will then
become the basis for the Index's value on the first trading day
following the adjustment.
The number of shares of each component stock in the Index portfolio
will remain fixed between quarterly rebalances except in the event of
certain types of corporate actions, such as the payment of a dividend
other than an ordinary cash dividend, stock dividend, stock split,
reverse stock split, rights offering, distribution, reorganization,
recapitalization, or similar event with respect to the component
stocks. In the case of a merger or consolidation of an issuer of a
component stock, if the stock remains in the Index, the number of
shares of that security in the portfolio may be adjusted to the nearest
whole share to maintain the component's relative weight in the Index at
the level immediately prior to the corporate action. In the event of a
stock addition or replacement, the average dollar value of the
remaining portfolio components will be calculated and that amount
invested in the stock of new component, to the nearest whole share. In
all cases, the divisor will be adjusted, if necessary, to ensure Index
continuity. All stock replacements and the handling of non-routine
corporate actions will be announced at least ten business days in
advance of such effective change, whenever possible. The Exchange will
make this information available to the public through dissemination of
an information circular.
Unit of Trading: Each option contract will represent $100, the
Index multiplier, times the Index value. For example, an Index value of
200 will result in an option contract value of $20,000 ($100 x $200).
Exercise Price: The exercise prices will be set in accordance with
Phlx Rule 1101A(a).
Settlement: A.M.--settled index options.
Settlement Value: The Index value for purposes of settling
outstanding Index option contracts upon expiration will be calculated
based upon the regular way opening sale prices for each of the Index's
component stocks in their primary market on the last trading day
[[Page 65632]]
prior to expiration. In the case of National Market securities traded
through Nasdaq, the first reported sale price will be used for the
final settlement value for expiring Index option contracts. In the
event that a component security does not open for trading on the last
day before the expiration of a series of Index options, the last sale
price for that security will be used in calculating the Index value.
However, in the event that the Options Clearing Corporation (``OCC'')
determines that the current Index value is unreported or otherwise
unavailable (including instances where the primary market for
securities representing a substantial part of the value of the Index is
not open for trading at the time when the current Index value used for
exercise settlement purposes would be determined), the OCC shall
determine an exercise settlement amount for the Index in accordance
with Article XVII, Section 4 of the OCC By-Laws.\8\
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\8\ See, e.g., OCC Article XVII, Section 4 and Securities
Exchange Act Release No. 37315 (June 17, 1996), 61 FR 32471 (June
24, 1996) (order approving File No. SR-OCC-95-19).
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Last Trading Day: Last business day prior to the third Friday of
the month for options which expire on the Saturday following the third
Friday of that month.
Trading Hours: 9:30 a.m. to 4:02 p.m.
Position and Exercise Limits: The Street.com Internet Index is an
industry or narrow-based index option. Accordingly, the Exchange will
employ position and exercise limits pursuant to Phlx Rules 1001A(b) and
1002A, respectively. The position and exercise limits will be 15,000
contracts.
Expiration Cycles: Three months from the March, June, September,
December cycle, plus two additional near-term months.
Exercise Style: European.
Premium Quotations: Premiums will be expressed in terms of dollars
and fractions of dollars pursuant to Phlx Rule 1033A. For example, a
bid or offer of 1\1/2\ will represent a premium per options contract of
$150 (1\1/2\ x 100).
The Street.com Internet Index value will be disseminated every 15
seconds during the trading day. The Phlx has retained Bridge Data Inc.
to compute and perform all of the necessary maintenance of the
Index.\9\ Pursuant to Phlx Rule 1100A, updated Index values will be
disseminated and displayed by means of primary market prints reported
by the Consolidated Tape Association and over the facilities of the
Options Price Reporting Authority. The Index value will also be
available on broker-dealer interrogation devices to subscribers of
options information. The Exchange represents that it has the capacity
to handle the additional traffic of The Street.com Internet Index.
Further, the Options Price Reporting Authority (``OPRA'') represents
that it has the capacity to handle the additional traffic generated by
the Index.\10\
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\9\ As a back-up to Bridge Data Inc., the Phlx will utilize its
own internal calculation system called the Index Calculation Engine
(``ICE'') System.
\10\ See Letter from Joe Corrigan, Executive Director, OPRA, to
Michael Walinskas, Deputy Associate Director, Commission dated
September 22, 1998.
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The options will be traded pursuant to current Phlsx rules
governing the trading of index options including provisions addressing
sales practices, floor trading procedures, position and exercise
limits, margin requirements and trading halts and suspensions.\11\ The
Exchange also represents that surveillance procedures currently used to
monitor trading in index options will be applicable to this Index
option. These procedures include having complete access to trading
activity in the underlying securities which are all traded on the NYSE
and Nasdaq. In addition, the Intermarket Surveillance Group (``ISG'')
Agreement dated July 14, 1983, as amended on January 29, 1990 and June
20, 1994 will be applicable to the trading of options on the Index.
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\11\ See Phlx Rule 722 and Rule Phlx Rules 1000A through 1102A;
See generally Phlx Rules 1000 to 1080.
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2. Statutory Basis
The Phlix believes that the proposed rule change is consistent with
Section 6 of the Act in general, and in particular, with section
6(b)(5),\12\ in that it is designed to promote just and equitable
principles of trade, foster cooperation and coordination with persons
engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanisms of a free and open market and
a national market system, and to protect investors and the public
interest.
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\12\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the introduction of the
proposed The Street.com Internet Index will serve to promote the public
interest and help to remove impediments to a free and open securities
market by providing investors with a means of hedging exposure to
market risks associated with the securities issued by companies that
comprise this subsector of the computer industry. The trading of
options on the Index will permit investors to participate in the price
movement of the 20 securities on which the Index is based. The trading
of options on the Index will allow investors holding positions in some
or all of the securities underlying the Index to hedge the risks
associated with these securities. Accordingly, the Exchange believes
that options on the Index will provide investors with an additional
trading and hedging mechanism that outweighs any potential for
manipulation that would diminish public confidence. Further, the
Exchange believes that the proposed Index will have a positive impact
on efficiency, competition and capital formation consistent with
section 3(f) of the Act.\13\
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\13\ 15 U.S.C. 78c(f).
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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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Because the foregoing rule change complies with the standards set
forth in the Generic Index Approval Order,\14\ it has become effective
pursuant to section 19(b)(3)(A) of the Act \15\ and subparagraph (e) of
Rule 19b-4 thereunder.\16\ Pursuant to the Generic Index Approval
Order, the Exchange may not list options on the Street.com Internet
Index prior to thirty days after the date that the proposed rule change
was filed with the Commission.
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\14\ See note 5, supra.
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(e).
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At any time within 60 days of the filing of such proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors or otherwise in
furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
is consistent with the Act. Persons making written submissions should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC
[[Page 65633]]
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 in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Phlx. All submissions should refer to File No. SR-Phlx-98-48 and should
be submitted by December 18, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31583 Filed 11-25-98; 8:45 am]
BILLING CODE 8010-01-M
