[Federal Register Volume 62, Number 29 (Wednesday, February 12, 1997)]
[Notices]
[Pages 6596-6598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3477]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38247; File No. SR-Phlx-97-05]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., To Reduce the Value of
the Super Cap Index
February 5, 1997.
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 January
9, 1997, 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to reduce the value of its Super Cap Index
(``Index'') option (``HFX'') to one-half its present value by doubling
the divisor used in calculating the Index. The Index is comprised of
the top five options-eligible common stocks of U.S. companies traded on
the New York Stock Exchange, as measured by capitalization. The other
contract specifications for the HFX will remain unchanged.
The text of the proposed rule change is available at the Office of
the Secretary, 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 Phlx included statements
concerning
[[Page 6597]]
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 Exchange began trading the HFX in November, 1995.\1\ The Index
value was created with a value of 350 on its base date of May 31, 1995
and has risen to 540 on January 29, 1997. Thus, the value of the Index
has increased 54% since it was first created.\2\ Consequently, the
premium for HFX options has also risen. In May, 1996, the Exchange
filed a proposed rule change to reduce the value of the Index by one-
third; although this proposal was approved by the Commission,
operational limitations prevented its implementation.\3\ Thus, the
Index has never been split.
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\1\ See Securities Exchange Act Release No. 36369 (October 13,
1995), 60 FR 54274 (October 20, 1995).
\2\ See letter from Theresa A. McCloskey, Vice President,
Regulatory Services, Phlx, to James T. McHale, Attorney, Office of
Market Supervision, Division of Market Regulation, Commission, dated
January 31, 1997 (``Phlx letter'').
\3\ See Securities Exchange Act Release No. 37536 (August 7,
1996) (SR-Phlx-96-17). The Options Clearing Corporation was not able
to accept certain strike prices resulting from a three-for-one
split, because dividing certain strike prices by three resulted in a
strike price with too many decimal places. This operational
limitation does not arise in a two-for-one split.
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As a result, the Exchange proposes to conduct a ``two-for-one
split'' of the Index, such that the value would be reduced to one-half
of its present value. In order to account for the split, the number of
HFX contracts will be doubled, such that for each HFX contract
currently held, the holder would receive two contracts at the reduced
value, with a strike price one-half of the original strike price. For
instance, the holder of a HFX 540 call will receive two HFX 270 calls.
In addition to the strike price being reduced by one-half, the position
and exercise limits applicable to the HFX will be doubled, from 5,500
contracts \4\ to 11,000 contracts, for a six month period after the
split is effectuated.\5\ This procedure is similar to the one employed
respecting equity options where the underlying security is subject to a
two-for-one stock split, as well as previous reductions in the value of
other Phlx indexes.\6\ The trading symbol will remain HFX.
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\4\ See Phlx Rule 1001A(c).
\5\ After this six month period, the position and exercise
limits will return to the current level of 5,500 contracts.
\6\ See Securities Exchange Act Release Nos. 36577 (December 12,
1995), 60 FR 65705 (December 20, 1995) (reducing the value of the
Phlx National Over-the-Counter Index); and 35999 (July 20, 1995), 60
FR 38387 (July 26, 1995) (reducing the value of the Phlx
Semiconductor Index).
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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.\7\
The Exchange will announce the effective date by way of an Exchange
memorandum to the membership, also serving as notice of the strike
price and position limit changes.\8\
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\7\ Specifically, because the Index value would be less than
500, the applicable strike price interval would be $5 in the first
four months and $25 in the fifth month. See Rule 1101A(a).
\8\ The Exchange will issue more than one memorandum, including
one naming the effective date of the split and the specific strike
prices for the new, split option.
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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 $2,125 per contract.\9\ The Exchange
believes that certain investors and traders currently may be impeded
from trading at such levels. With the Index split, that same option
series (once adjusted), with all else remaining equal, could trade at
approximately $1,062 per contract. The Phlx believes that a reduced
premium value should encourage additional investor interest.
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\9\ With the Index at 540, a February 540 call on January 29,
1997 was priced at approximately 21\1/4\, multiplied by 100=$2125.
See Phlx letter, supra note 2.
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The Exchange believes that Super Cap Index options provide an
important opportunity for investors to hedge and speculate upon the
market risk associated with the underlying 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, in turn,
should attract additional investors and create a more active and liquid
trading environment.
The Exchange believes that the proposed rule change is consistent
with Section 6 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, as well as to protect investors and the public
interest, by establishing a lower index value, which should, in turn,
facilitate trading in Super Cap Index options. The Exchange believes
that reducing the value of the Index does not raise manipulation
concerns and would 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
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 self-regulatory organization 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 will also be available
for inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-97-05 and should be
submitted by [insert date 21 days from date of publication].
[[Page 6598]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3477 Filed 2-11-97; 8:45 am]
BILLING CODE 8010-01-M
