[Federal Register Volume 59, Number 47 (Thursday, March 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5480]
[[Page Unknown]]
[Federal Register: March 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33700; File No. SR-PSE-93-07]
Self-Regulatory Organizations; Order Approving and Notice of
Filing and Order Granting Accelerated Approval of Amendment Nos. 1 and
2 to a Proposed Rule change by the Pacific Stock Exchange, Inc.
Relating to the Listing and Trading of Quarterly Index Expiration
Options Based on the Wilshire Small Cap Index
March 2, 1994.
On April 21, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide for the listing and
trading of options on the Wilshire Small Cap Index (``Wilshire Index'')
that will expire on the last business day of each calendar quarter
(``Quarterly Index Expirations'' or ``QIXs'').\3\ Currently, Wilshire
Index options traded on the Exchange expire on the Saturday immediately
following the third Friday of the expiration month. The PSE intends to
trade Wilshire Index QIXs in addition to the existing Wilshire Index
options expiring at the middle of the month. Notice of the proposed
rule change appeared in the Federal Register on June 23, 1993.\4\ No
comments were received on the proposed rule change. On December 28,
1993, the Exchange filed Amendment No. 1 to the proposed rule
change.\5\ On February 8, 1994, the Exchange filed Amendment No. 2 to
the proposed rule change.\6\ This order approves the proposal.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\The Wilshire Small Cap Index is a broad-based,
capitalization-weighted index of domestic equity securities traded
on the New York Stock Exchange, Inc. (``NYSE''), American Stock
Exchange, Inc. (``Amex''), and as national market securities traded
through the facilities of the National Association of Securities
Dealer's Automated Quotation system. The Index is composed of 250
domestic equity securities, and is designed to reflect the
characteristics and market performance of small stocks generally.
\4\See Securities Exchange Act Release No. 32485 (June 17,
1993), 58 FR 26013 (June 23, 1993).
\5\In Amendment No. 1, the PSE proposes to add subparagraph (u)
to Rule 7.1 to include a definition of QIX options. See Letter from
Michael Pierson, Senior Attorney, Market Regulation PSE, to Richard
Zack, Branch Chief, Office of Derivatives and Equity Regulation,
Division of Market Regulation, Commission, dated December 28, 1993.
\6\In Amendment No. 2, the PSE proposes (1) to adopt Rule 7.8(d)
specifying the terms of QIX options; and (2) to change a reference
in proposed Rule 7.6(d)(2) from ``Exchange'' to ``Board.'' In
Amendment No. 2, the Exchange also agrees that: (1) the use of any
multiplier with respect to QIX options other than 100 will require
Commission approval pursuant to Section 19(b) of the Act; (2) any
proposal to list and trade QIX options with more than twelve months
to expiration will require Commission approval pursuant to Section
19(b) of the Act; and (3) QIX options will be subject to the same
rules that presently govern the trading of existing Wilshire Small
Cap Index options contracts, including sales practice rules, margin
requirements, and floor trading procedures. See Letter from Michael
Pierson, Senior Attorney, Market Regulation, PSE, to Brad Ritter,
Attorney, Office of Derivatives and Equity Regulation, Division of
Market Regulation, Commission, dated February 7, 1994 (``February 7
Letter'').
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The Exchange proposes to add subparagraph (d) to Rule 7.8 to
provide for the listing of up to eight near-term quarterly expirations
for trading on Wilshire Index options. The PSE would be permitted at
any one time to have up to eight QIX Wilshire Index options open for
trading with expiration dates on the last business day of a calendar
quarter.\7\ Accordingly, Wilshire Index QIXs will have expirations
approximately two weeks apart from existing Wilshire Index option
expirations in the quarterly month expiration.
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\7\Presently, options traded at the PSE expire on the Saturday
following the third Friday of the expiration month. The PSE trades
index options with expirations of up to one year in length that
expire at three month intervals. The Exchange allows for up to six
expiration months with none farther out than twelve months. The PSE
is not now proposing to list or trade Wilshire Index QIX options
with more than twelve months to expiration. Any such proposal would
be filed with the Commission for review under Section 19(b) of the
Act. Id.
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The proposed QIX options will trade simultaneously with, not
independent of, currently listed and traded Wilshire Index options. The
proposed QIX options will be subject to the same rules that presently
govern the trading of existing Wilshire Index options contracts,
including sales practice rules, margin requirements, and floor trading
procedures.\8\ Contract terms for the QIX options will be similar, for
the most part, to the corresponding Wilshire Index options that
presently trade on the Exchange. For example, Wilshire Index QIXs will
have European-style\9\ exercise. The daily exercise settlement value of
the index will be based, however, on the value of closing prices of
component stocks, rather than opening prices.\10\
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\8\Id.
\9\A European-style option is one that may be exercised only
during a specified period prior to the expiration of the option.
\10\Regular options on the Wilshire Index are settled based on
the opening prices of the component securities. See Securities
Exchange Act Release No. 31397 (November 3, 1992), 57 FR 53368
(November 9, 1992) (``Exchange Act Release No. 31397'').
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With regard to position and exercise limits,\11\ the PSE is
proposing to amend Rule 7.6 to provide that Wilshire Index QIXs will be
subject to the 37,500 contract limit currently specified for Wilshire
Index options, but without the 22,500 contract limit or ``telescoping
requirement'' for the series with the nearest expiration date
applicable for regular Wilshire Index options.\12\ For the purpose of
this test, regular Wilshire Index options would be aggregated with the
Wilshire Index QIXs, however, in the case of regular Wilshire Index
options, the 22,500 contract telescoping requirement continues to
apply.
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\11\Position limits are the maximum number of option contracts
permitted on the same side of the market with respect to a single
underlying interest that may be held or written by a single investor
or group of investors acting in concert. Exercise limits are the
maximum number of option contracts on the same underlying interest
that a single investor or group of investors acting in concert may
exercise during any five consecutive business days.
\12\See Securities Exchange Act Release No. 32554 (June 29,
1993), 58 FR 36492 (July 7, 1993).
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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).\13\ In particular, the
Commission believes that the proposed rule change is designed to
provide investors with a tailored quarterly portfolio hedge that may be
more suitable to their investment needs. Specifically, by providing
investors with the ability to use Wilshire Index QIX options that
settle based on the value of component stocks on the last business day
of the calendar quarter, the PSE proposal will allow investors
increased flexibility to tailor their portfolio positions to satisfy
their investment objectives. For instance, according to the PSE, the
performance of portfolio managers and institutional investors is judged
on a quarterly basis.\14\ Therefore, in the past, these investors have
been forced to pursue ``quarterly hedges'' in the over-the-counter
(``OTC'') market employing forwards, options, and/or swaps.
Accordingly, the Commission believes the PSE proposal is a reasonable
response by the Exchange to meet the demands of sophisticated portfolio
managers and other institutional investors who are increasingly using
the OTC market in order to satisfy their hedging needs, and will
thereby promote competition among these markets.\15\
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\13\15 U.S.C. 78f(b)(5) (1982).
\14\In addition, many investment strategies employed by these
portfolio managers converge at the calendar quarter. Hence,
traditional exchange-type expirations provide a less than perfect
hedge for many institutions.
\15\Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new option proposal upon a finding that
the introduction of such new derivative instrument is in the public
interest. Such a finding would be difficult for a derivative
instrument that served no hedging or other economic function,
because any benefits that might be derived by market participants
likely would be outweighed by the potential for manipulation,
diminished public confidence in the integrity of the markets, and
other valid regulatory concerns.
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In addition, the Commission believes that the PSE proposal will
help promote the maintenance of a fair and orderly market because the
purpose of the proposal is to extend the benefits of a listed, exchange
market in Wilshire Index options to quarterly calendar expirations. The
attributes of the Exchange's Wilshire Index options market versus an
OTC market include, but are not limited to, a centralized market
center, an auction market with posted market quotations and transaction
reporting, standardized contract specifications, parameters and
procedures for clearance and settlement, and the guarantee of the
Options Clearing Corporation (``OCC'') for all contracts traded on the
Exchange.\16\
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\16\See Securities Exchange Act Release No. 31898 (February 22,
1993), 58 FR 11878 (March 1, 1993).
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The Commission also notes that the Exchange's existing rules
applicable to stock index options, including among others, strike price
interval, bid/ask differential, price continuity, and sales practice
rules and position and exercise limits will apply to QIX options.\17\
In particular, Wilshire Index QIXs will be subject to a 37,500 contract
limit under Rule 7.6 without a telescoping provision, and will be
aggregated with regular Wilshire Index contracts.\18\ Accordingly, all
Wilshire Index options contract positions are limited in total to a
37,500 position limit.
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\17\See February 7 Letter, supra note 6.
\18\Regular Index options will continue to be subject to limits
of 37,500 contracts with a telescoping limit of 22,500 contracts in
the near term series. In the aggregate, all Wilshire Index contracts
are limited to the position limits of 37,500 contracts established
for this particular contract, however, in the near-term series, no
more than 22,500 of these contracts may be regular Index options.
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The Commission notes that Wilshire Index QIXs will be treated like
regular Wilshire Index options except for expiration settlement which
will be based on the closing values of the component securities.\19\
Although the Commission continues to believe that basing the settlement
of index products on opening, as opposed to closing prices on
Expiration Fridays helps alleviate stock market volatility,\20\ these
concerns are reduced in the case of Wilshire Index QIXs, since
expiration of these stock index options will not correspond with the
normal expiration of stock index options, stock index futures, and
options on stock index futures. In particular, Wilshire Index QIXs will
never expire on an ``Expiration Friday'' or any other ``Expiration
Fridays'' in March, June, September, and December, thereby diminishing
the impact that Wilshire Index QIXs could have on the market.
Accordingly, the Commission believes that Wilshire Index QIX options
will not compromise the protection of investors or have an adverse
market effect. Of course, the Commission expects the PSE to monitor the
actual effect of Wilshire Index QIXs once trading commences and take
prompt action (including timely communication with marketplace self-
regulatory organizations responsible for oversight of trading in
component stocks) should any unanticipated adverse market effects
develop.
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\19\See Exchange Act Release No. 31397, supra note 10.
\20\See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992).
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Lastly, based on representations from the PSE, the Commission
believes that the PSE and the Options Price Reporting Authority
(``OPRA'') will have adequate systems processing capacity to
accommodate the additional options listed in connection with QIX
options.\21\
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\21\See Letter from Michael Pierson, Senior Attorney, PSE, to
Brad Ritter, Attorney, Office of Derivatives and Equity Regulation,
Division of Market Regulation, Commission, dated February 25, 1994,
incorporating a memorandum from Joseph Corrigan, Executive Director,
OPRA, to Kim Koppien, PSE, dated February 24, 1994.
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The Commission finds good cause for approving Amendment Nos. 1 and
2 to the proposed rule change prior to the thirtieth day after the date
of publication of notice thereof in the Federal Register. The
Commission finds that Amendment Nos. 1 and 2 more closely conform the
Exchange's proposal to proposals previously approved by the Commission
with respect to the listing and trading QIX options.\22\ Specifically,
Amendment Nos. 1 and 2 provide definitions and additional listing and
trading standards that are specifically tailored to Wilshire Index
QIXs. The Commission believes that these additional standards
strengthen the integrity of the security and may promote stability in
the marketplace. Additionally, the Commission has not received any
comments on this proposal. Therefore, the Commission believes it is
consistent with sections 6(b)(5)\23\ and 19(b)(2)\24\ of the Act to
approve Amendment Nos. 1 and 2 to the proposal on an accelerated basis.
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\22\See, e.g., Securities Exchange Act Release No. 32693 (July
29, 1993), 58 FR 41817 (August 5, 1993) (order approving the listing
and trading of QIX options by the Chicago Board Options Exchange,
Inc. on the Russell 200 Index).
\23\15 U.S.C. 78f(b)(5) (1988).
\24\15 U.S.C. 78s(b)(2) (1988).
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Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1 and 2 to the proposed rule
change. Persons making written submissions should file six copies
thereof with the Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 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, DC. Copies of such
filing will also be available for inspection and copying at the
principal office of the PSE. All written submissions should refer to
File No. SR-PSE-93-07 and should be submitted by March 31, 1994.
It is therefore ordered, Pursuant to section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-PSE-93-07) is approved.
\25\15 U.S.C. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5480 Filed 3-9-94; 8:45 am]
BILLING CODE 8010-01-M