[Federal Register Volume 61, Number 26 (Wednesday, February 7, 1996)]
[Notices]
[Pages 4697-4698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2541]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36785; File No. SR-Phlx-95-69]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc; Relating to the Bid
Test Exemption
January 29, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on January 2, 1996, 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. 78s(b)(1) (1988).
---------------------------------------------------------------------------
I. Self-Regulatory Organizations' Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend its Rule 1072, Reporting Requirements
Applicable to Short Sales in NASD/NM Securities, which establishes
specific criteria exempting Phlx specialists and Registered Option
Traders (``ROTs'') from the National Association of Securities Dealers,
Inc. (``NASD'') ``bid test'' applicable to National Market (``NM'')
securities. The NASD bid test, with certain exceptions, prohibits short
sales at or below the current insider bid when that bid is below the
previous inside bid.\2\ Specifically, the Phlx proposes to extend its
market maker exemption to: (1) Permit an off-floor option or stock
option order hedged contemporaneously with an NM security to be
eligible for the exemption, with prior Floor Official approval and
filing of a written report; and (2) allow the exemption to apply to a
company that is involved in a publicly announced merger or acquisition
(``M&A'') with an NM security.
\2\ NASD Rules of Fair Practice, Art. III, Section 48.
---------------------------------------------------------------------------
First, sub-paragraph (A) of Phlx Rule 1072(c)(2)(ii) is proposed to
be added to permit a ROT to facilitate an off-floor options or
combination order and contemporaneously hedge the resulting option
position with a short sale in the applicable NM securities as if such
securities were designated securities pursuant to the Rule. The ROT
must obtain written Floor Official approval and file with the Market
Surveillance Department of the Exchange a written report in a form
required by the Exchange. Such ROT must retain a copy of the report to
demonstrate that the transaction was bid test exempt.
Second, sub-paragraph (B) of Phlx Rule 1072(c)(2)(ii) is proposed
to be added to state that exempt hedge transactions include short sales
in M&A securities effected by a qualified Exchange options market maker
to hedge, and which in fact serves to hedge, an existing or prospective
position in an Exchange-listed option overlying a designated NM
security of another company that is a party to the M&A. M&A securities
are defined as the securities of a company that is a party or
prospective party to a publicly announced merger or acquisition with an
issuer of an NM security that underlies an Exchange-listed option.
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
In 1994, the NASD adopted a bid test rule applicable to NM
securities traded through Nasdaq prohibiting short sales of NM
securities at or below the current inside bid when that bid is below
the previous inside bid.\3\ An exemption from this rule exists for
option market makers hedging positions with the underlying securities
of that option; qualifying short sales are referred to as ``exempt
hedge transactions.'' Pursuant to this market maker exemption, the Phlx
adopted Rule 1072 establishing specific criteria for a short sale to
qualify as an ``exempt hedge transaction'' in ``designated'' NM
issues.\4\ Generally, option specialists may rely on the exemption for
short sales in NM securities underlying their specialist equity
options, and index options if at least 10% of the value of the index is
comprised of NM securities. In addition, ROTs must be assigned in that
option to rely on the exemption and may only use the exemption in 20
designated NM issues.
\3\ Securities Exchange Act Release No. 34277 (June 6, 1994), 59
FR 34885 (granting temporary approval).
\4\ Securities Exchange Act Release No. 34632 (September 2,
1994), 59 FR 46999. The other options exchanges adopted rules
similar to Phlx Rule 1072. See Chicago Board Options Exchange
(``CBOE'') Rule 15.10, New York Stock Exchange (``NYSE'') Rule 759A,
American Stock Exchange (``Amex'') Rule 957, and Pacific Stock
Exchange (``PSE'') Rule 4.19. Id.
---------------------------------------------------------------------------
The Phlx now proposes to permit the facilitation of certain off-
floor orders pursuant to the market maker exemption. The Phlx also
proposes to expand the definition of ``exempt hedge transaction'' to
include securities involved in an M&A transaction with NM securities.
These amendments to the Exchange's exemptive rule are similar to recent
changes by other options exchanges.\5\
\5\ Respecting facilitation orders, see Securities Exchange Act
Release No. 35281 (January 26, 1995), 60 FR 6575 (``CBOE''); and
respecting M&A securities, see Securities Exchange Act Release Nos.
35211 (January 10, 1995), 60 FR 3887 (Amex, CBOE, and PSE) as well
as 36019 (July 24, 1995), 60 FR 39035 (NYSE).
---------------------------------------------------------------------------
Facilitating Orders
The Phlx proposes to permit certain hedge transactions in NM
securities by a ROT to be considered executed in ``designated'' issues
for purposes of qualifying as exempt hedge transactions.
[[Page 4698]]
Such a transaction must contemporaneously hedge an option position
resulting from the facilitation of an option or stock-option order
originating from off-floor. The Exchange believes that this provision
is consistent with the NASD's interpretation regarding hedging
activities associated with the facilitation of customer transactions in
options, as cited by the Commission in its approval of a similar CBOE
provision.\6\ To ensure that the transaction qualifies for the proposed
provision, the filing of a written report with the Market Surveillance
Department of the Exchange, indicating Floor Official approval, is
required. Floor Official approval is intended as a monitoring
technique. Similarly, the Phlx believes that the written report should
aid surveillance efforts regarding Rule 1072 in general, and, more
specifically, the requirements of this proposed provision. Surveillance
capabilities should be further enhanced by the requirement that a ROT
relying on this provision maintain a copy of the report. Thus, the Phlx
believes that this facilitation provision should operate consistently
with the purposes of the market maker exemption contained in the Rule.
Exempting such hedge transactions should promote facilitation orders in
the option marketplace as well as liquidity in the underlying NM
security.
\6\ See Securities Exchange Act Release No. 35281, supra note 5.
---------------------------------------------------------------------------
M&A Transactions
The Phlx proposes to expand the definition of ``exempt hedge
transaction'' in its market maker exemption to permit short sales in
securities involved in a publicly announced M&A with a designated NM
security in order to foster liquidity and promote effective hedging.
The Exchange notes that the proposed expansion of the market maker
exemption must involve a publicly announced M&A.\7\ The Exchange also
notes that the NASD provides an exemption from the bid test for risk
arbitragers who take positions in stocks involved in M&A
transactions,\8\ and that the other option exchanges have adopted this
change to their respective rules.\9\
\7\ Once an M&A has been publicly announced, a qualified market
maker in one of the two affected securities may immediately register
as a qualified market maker in the other security, and thus rely on
the market maker exemption in such other security. See NASD Rules,
Art. III, Section 48(1)(3)(iii).
\8\ See Securities Exchange Act Release No. 34277, supra note 3.
\9\ See Securities Exchange Act Release Nos. 35211 and 36019,
supra note 5.
---------------------------------------------------------------------------
As applied to the Phlx specialist, the proposed exemption would
apply to short sales of a company that is party to an M&A with a
company whose NM security underlies a speciality stock option (or
qualified index option). As applied to a Phlx ROT, the exemption would
extend to a company that is party to an M&A with a company whose NM
security underlies an option designated by such ROT. The Phlx believes
that specialists and ROTs may need to hedge option positions with the
securities involved in an M&A with the underlying security, whether or
not the security of such other company has overlying listed options.
This ability to hedge is central to the market making function, and
should thereby promote liquidity in the markets for the option as well
as both securities.
The Exchange believes that the proposal is consistent with the
NASD's bid test rule and addresses the limitations established by the
NASD concerning the applicability of the market maker exemption.
Specifically, the Phlx believes that the ability to hedge facilitated
off-floor option orders constitutes legitimate hedging activity by a
ROT with resulting benefits to the marketplace, while restricting the
expansion of the exemption to bona fide, Exchange-monitored
transactions. The Exchange also believes that expanding the definition
of exempt hedge transaction to include M&A securities should enable
effective hedging in the often-volatile markets surrounding M&A events,
which should, in turn, promote liquidity.
For these reasons, the Exchange believes that its proposal 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 principals of trade, prevent fraudulent and manipulative acts
and practices, to remove impediments to and perfect the mechanism of a
free and open market as well as to protect investors and the public
interest by promoting options trading where an M&A is involved or an
off-floor order seeks facilitation, which, in turn, creates a hedging
need, thereby promoting liquidity and the essence of the market making
function.
(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
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of 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 such 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. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street NW.,
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 File No.
SR-Phlx-95-69 and should be submitted by February 28, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
\10\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2541 Filed 2-6-96; 8:45 am]
BILLING CODE 8010-01-M
