[Federal Register Volume 62, Number 57 (Tuesday, March 25, 1997)]
[Notices]
[Pages 14177-14179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7394]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38415; File No. SR-Phlx-97-05]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc.
Relating to Reducing the Value of the Super Cap Index
March 18, 1997.
On January 9, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change 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 (''NYSE''), as measured
by capitalization. The other contract
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specifications for the HFX will remain unchanged.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposal was published for comment and appeared in
the Federal Register on February 12, 1997.\3\ No comment letters were
received on the proposal. On March 18, 1997, the Phlx filed Amendment
No. 1 to the proposed rule change.\4\ This order approves the Phlx's
proposal, as amended.
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\3\ See Securities Exchange Act Release No. 38247 (February 5,
1997), 62 FR 6596 (February 12, 1997).
\4\ In Amendment No. 1, the Exchange provides that the position
and exercise limits for HFX options will remain at 5,500 contracts,
as opposed to being doubled as originally proposed, upon the
effective date of the two-for-one split of the Index. The Phlx
states that because the Super Cap Index currently maintains low open
interest in the non-expiring series, non of which involves customer
accounts, the Phlx does not believe a doubling of the position and
exercise limits is warranted. See letter from Theresa McCloskey,
Vice President, Regulatory Services, Phlx, to Sharon Lawson, Senior
Special Counsel, Office of Market Supervision (``OMS''), Division of
Market Regulation (`'Divsion''), Commission, dated March 17, 1997
(``Amendment No. 1'').
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I. Description of the Proposal
The Exchange began trading the HFX in November, 1995.\5\ The Index
was created with a value of 350 on its base date of May 31, 1995 which
rose to 540 on January 29, 1997. Thus, the value of the Index has
increased 54% since inception.\6\ Consequently, the premium for HFX
options also has risen. In May, 1996, the Exchange filed a proposed
rule change to reduce the value of the Index to one-third of its then
present value; although this proposal was approved by the Commission,
operational limitations prevented its implementation.\7\ Thus, the
Index has never been split.
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\5\ See Securities Exchange Act Release No. 36369 (October 13,
1995), 60 FR 54272 (October 20, 1995).
\6\ See letter from Theresa A. McCloskey, Vice President,
Regulatory Services, Phlx, to James T. McHale, Attorney, OMS,
Division, Commission, dated January 31, 1997 (``Phlx letter'').
\7\ 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.
The position and exercise limits applicable to the HFX will remain at
5,500 contracts,\8\ and the trading symbol will remain HFX.
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\8\ See Amendment No. 1, Supra note 4.
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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.\9\
The Exchange will announce the effective date of the split by way of an
Exchange memorandum to the membership, which will include notice of the
strike price changes.\10\
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\9\ Specifically, because the Index value would be less than
500, the applicable strike price interval would be $5 in the near
term months (the first four consecutive months series) and $25 in
the far term. See Rule 1101A(a).
\10\ See note 13, infra.
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The Phlx states that 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.\11\ 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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\11\ With the Index at 540, a February 540 call on January 29,
1997 was priced at approximately 21\1/4\, multiplied by 100=$2,125.
See Phlx letter, supra note 6.
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In support of its proposal, the Exchange notes 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, the Phlx believes such investors
will be able to utilize this trading vehicle, while extending a smaller
outlay of capital. The Exchange believes that this, in turn, should
attract additional investors and create a more active and liquid
trading environment.
II. Discussion
The Commission finds that 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) of the Act.\12\ Specifically, the
Commission believes that reducing the value of the Index will serve to
promote the public interest and help remove impediments to a free and
open securities market, by providing a broader range of investors with
a means of hedging exposure to market risk associated with securities
representing the most highly capitalized companies traded on the NYSE.
Further, the Commission notes that reducing the value of HFX options
should help attract additional investors, thus creating a more active
and liquid trading market. The Commission notes that the Phlx will be
providing market participants with adequate prior notice of the Index
level change in order to avoid investor confusion.\13\
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\12\ 15 U.S.C. 78f(b)(5).
\13\ The Phlx will be issuing a circular to its membership,
within one week of the effective date of the change, which will
advise members of the reduction in value of the HFX and specific
strike prices for the adjusted HFX options. Telephone Conversation
between Edith Hallahan, Special Counsel, Regulatory Services, Phlx,
and James T. McHale, Attorney, OMS, Division, Commission, on March
17, 1997.
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The Commission believes that doubling the Index's divisor will not
have an adverse market impact or make trading in HFX options
susceptible to manipulation. After the split, the Index will continue
to be comprised of the same stocks with the same weightings, will be
calculated in the same manner (except for the change in divisor) and
will have the same position and exercise limits. Finally, the Phlx's
surveillance procedures also will remain the same.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. Amendment No. 1
provides that the position and exercise limits for HFX options will
remain at 5,500 contracts, as opposed to being doubled as originally
proposed, upon the effective date of the two-for-on split of the Index.
The Phlx states that because the Super Cap Index currently maintains
low open interest in the non-expiring series, none of which involves
customer accounts, the Phlx does not believe a doubling of the position
and exercise limits is warranted. The Commission finds that Amendment
No. 1 strengthens the proposal by maintaining position and exercise
limits at their current levels, which should continue to reduce the
likelihood of manipulation. Moreover, the Commission notes that all of
the market participants holding existing positions in HFX options will
continue to hold positions well within the 5,500 contract limit once
the Index is split and their positions are doubled. Accordingly, there
is no market need to double position limits, as Phlx originally
proposed, to provide investors a period of time in which to reduce
their double
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positions to the lower limit levels. The Commission also notes that no
comments were received on the original Phlx proposal, which was subject
to the full 21-day comment period. Therefore, the Commission believes
that it is consistent with Section 6(b)(5) of the Act to approve
Amendment No. 1 to the proposed rule change on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
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, N.W.,
Washington, D.C. 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 April 15, 1997.
For the foregoing reasons, the Commission finds that the Phlx's
proposal, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the amended proposed rule change (SR-Phlx-97-05) is
approved.
\14\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulations,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7394 Filed 3-24-97; 8:45 am]
BILLING CODE 8010-01-M
