[Federal Register Volume 61, Number 71 (Thursday, April 11, 1996)]
[Notices]
[Pages 16156-16157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9021]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37077; File No. SR-Phlx-95-86]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating
to Index Options Exercise Advices
April 5, 1996.
I. Introduction
On December 28, 1995, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``Commission''), 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 amend Phlx Rule 1042A,
Exercise of Option Contracts, and Floor Procedure Advice (``Advice'')
G-1, Exercise Requirements. The Phlx proposes to extend the deadline
for the receipt or preparation of a memorandum to exercise, as well as
the submission of an exercise advice form, from five minutes after the
close of trading to 4:30 p.m. In addition, as minor changes to
paragraph (ii) will result in the inclusion of the National Over-the-
Counter Index option, Phlx Rule 1042A(a)(iii) will be deleted.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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The proposed rule change appeared in the Federal Register on
February 27, 1996.\3\ No comments were received on the proposed rule
change. This order approves the Phlx's proposal.
\3\ See Securities Exchange Act Release No. 36862 (February 20,
1996), 61 FR 7297 (February 27, 1996).
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II. Background and Description
Phlx Rule 1042A and Advice G-1 govern the exercise of index
options. These provisions state that with respect to index option
contracts, clearing members are required to follow the procedures of
the Options Clearing Corporation (``OCC'') for tendering exercise
notices. Phlx member organizations are also required to comply with the
following procedures. First, a memorandum to exercise any American-
Style index option must be received or prepared by the Phlx member
organization no later than five minutes after the close of trading on
the day of exercise. Thus, the current deadline is 4:15 p.m. for
narrow-based index options and 4:20 p.m. for broad-based index options.
Second, when exercising 25 or more American-style index option
contracts, other than an option contract on the National Over-the-
Counter Index, submission of an exercise advice form to the Exchange is
required no later than five minutes after the close of trading on the
day of exercise. Third, with respect to options on the National Over-
the-Counter Index, the deadline for compliance with the above
provisions is 4:20 p.m. or five minutes after the close of trading.
Pursuant to Phlx Rule 1042A(b), however, the above requirements are
not applicable with respect to any series of stock index options on the
last day of trading prior to the expiration date of such series of
options. The above stated requirements are also not applicable to
European-style index options which, by definition, cannot be exercised
prior to expiration. Lastly, the Exchange notes that the procedures for
exercising equity option contracts contained in Phlx Rule 1042, are not
affected by this rule proposal.
The Phlx proposes to establish a 4:30 p.m. deadline for both a
memorandum to exercise and exercise advice forms for all index options.
This will extend the cut-off time by 15 minutes for narrow-based index
options and by 10 minutes for broad-based index options. According to
the Phlx, the purpose of this rule change is to provide additional time
for the preparation and transmission of the required exercise
information. After the close of trading, index option position holders
are not instantly aware of their final positions, including hedges in
the underlying security and futures contracts. According to the Phlx,
knowing the exact, final position is often crucial to making a
determination of whether to exercise.
In addition, the current procedure for these submissions presents
logistical problems for compliance within five minutes after the close
of trading. For example, the distance between trading stations for
certain index options on the Phlx trading floor (e.g., Gold/Silver
Index) and the depository for advice submissions is not easy to
traverse within five minutes, especially at the close of trading when
there is a great deal of movement on the trading floor. If a trade
occurs during the final minute of trading, this situation is
exacerbated since additional time might be used to ensure that the
trade ticket and participation was properly submitted. And, as stated
above, reports from futures orders placed to hedge option positions
must still be ascertained, usually by going to another location on the
floor (e.g., the booth where telephones and clerks are located). The
Phlx believes that it is in the interest of order and safety to change
this process.
The Phlx believes that the current deadline not only creates time
pressure and uncertainty, but may also force index option traders not
to participate in large or complex trades, especially near the close,
thereby hampering liquidity. The Phlx believes that the extra time is
reasonable under these circumstances.
Lastly, to improve clarity, the Exchange proposes to delete
paragraph (a)(iii) of Phlx Rule 1042A and incorporate the exercise
requirements pertaining to options on the National Over-the-Counter
Index in paragraph (a)(ii).
III. Discussion
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, with the requirements of Section 6(b)(5),\4\ in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and will serve to
protect investors and the public interest. Specifically, the Commission
believes that the amendments to Phlx Rule 1042A and Advice G-1 to
extend the deadline for submitting exercise advice forms will benefit
market participants by allowing them to make investment decisions based
on the evaluation of their final positions after having completed
trading for the day.
\4\ 15 U.S.C. 78f(b) (1988).
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The Commission also believes that the proposal will benefit the
market in general by fostering higher quality markets at the close of
the trading day. First, market makers will not be preoccupied with the
process of submitting exercise advice forms prior to the actual close
of the market and, therefore, can concentrate more fully on proving a
quality market at the close. Second, market participants will be able
to determine whether or not their orders on other related markets were
executed, such as orders intended to hedge their options positions. If
their hedging transactions in other markets are not executed by 4:30
p.m., then, under the proposal, market participants will still be able
to exercise their options positions and not remain in an unhedged
position. Third, the proposal will give market participants additional
time to evaluate the closing prices of the stocks that are used to
calculate the indexes and determine whether or not to exercise their
positions.
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In addition, the Commission believes that the proposal to delete
paragraph (a)(iii) to Phlx Rule 1042A and to incorporate that provision
into paragraph (a)(ii) will help to clarify the application of the
rule.
IV. Conclusion
For the foregoing reasons, the Commission finds that the Phlx's
proposal to extend the deadline for the receipt or preparation of a
memorandum to exercise, as well as the submission of an exercise advice
form, 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,\5\ that the proposed rule change (SR-Phlx-95-86) is approved.
\5\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
\6\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9021 Filed 4-10-96; 8:45 am]
BILLING CODE 8010-01-M
