[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26067-26068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11945]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35694; File No. SR-PHLX-95-16]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to
Modifications of the Position and Exercise Limits for Narrow-Based
Index Options
May 9, 1995.
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 March 6,
1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``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
Currently, PHLX Rule 1001A, ``Position Limits,'' \1\ establishes
the following position limits for industry (or narrow-based) index
options (i) 5,500 contracts for an index where a single component stock
accounted, on average, for 30% or more of the index value during the
30-day period immediately preceding the review; (ii) 7,500 contracts
for an index where a single component stock accounted, on average, for
20% or more of the index value or any five component stocks together
accounted, on average, for more than 50% of the index value but no
single component stock accounted, on average, for 30% or more of the
index value during the 30-day period immediately preceding the review;
or (iii) 10,500 contracts where the conditions requiring a limit of
5,500 contracts or 7,500 contracts have not occurred. The PHLX proposes
to amend Exchange Rule 1001A(b)(1) and Exchange Rule 1002A, ``Exercise
Limits,'' \2\ to increase the position and exercise limits for industry
index options from 5,500, 7,500, or 10,500 contracts to 6,000, 9,000,
or 12,000 contracts.
\1\ Position limits impose a ceiling on the number of option
contracts which an investor or group of investors acting in concert
may hold or write in each class of options on the same side of the
market (i.e., aggregating long calls and short puts or long puts and
short calls).
\2\ Exercise limits prohibit an investor or group of investors
acting in concert from exercising more than a specified number of
puts or calls in a particular class within five consecutive business
days.
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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 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
The PHLX proposes to amend PHLX Rule 1001A to raise the position
limits for its narrow-based index options. Specifically, the PHLX
proposes to amend PHLX Rule 1001A(b)(1) to establish narrow-based index
option position limits of 6,000, 9,000, or 12,000 contracts. In
addition, the PHLX proposes to amend PHLX Rule 1002A to establish a
corresponding increase in exercise limits for industry index options.
Currently, the PHLX trades options on the following narrow-based
indexes:
(1) Gold/Silver Index (``XAU''): 5,500 contracts
(2) Utility Index (``UTY''): 10,500 contracts
(3) PHLX/KBW Bank Index (``KBX''): 10,500 contracts
(4) Phone Index (``PNX''): 5,500 contracts
(5) Semiconductor Index (``SOX''): 7,500 contracts
(6) Airline Sector Index (``PLN''): 10,500 contracts
These position limits, which are standard among all of the options
exchanges for narrow-based index options, are based on the degree of
concentration of a component stock of the index.\3\ Currently, under
PHLX Rule 1001A, the three-tiered levels of position and exercise
limits are 5,500, 7,500, or 10,500 contracts. For the reasons stated
below, the PHLX proposes to increase these limits to 6,000, 9,000, or
12,000 contracts.
\3\ See PHLX Rule 1001A.
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First, the Exchange notes that the current levels have been in
place since [[Page 26068]] 1993.\4\ However, there have been no further
increases in position limits since 1993, despite substantial changes in
the marketplace. Most notable among these changes, according to the
PHLX, is an appreciable growth in index options trading. This marked
increase in index options volume has significantly increased liquidity
in PHLX-traded index options, as open interest has similarly
increased.\5\
\4\ See Securities Exchange Act Release No. 33288 (Dec. 3,
1993), 58 FR 65221 (Dec. 13, 1993) (order approving File No. SR-
PHLX-93-07).
\5\ The PHLX states that index options volume increased 450%
(from 354,614 contracts to 1,957,171 contracts) in 1994 as compared
to 1993.
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Second, the Exchange believes that the proposed increases are
reasonable. The PHLX states that in prior releases approving increased
position limits, the Commission acknowledged that a gradual,
evlutionary approach has been adopted by the Commission and the various
options exchanges in increasing position and exercise limits.
Accordingly, the PHLX proposes a 33% increase in the lowest tier (from
5,000 to 6,000 contracts); a 31% increase for options currently at the
7,500 contract limit; and a 20% increase in the highest tier, which is
currently at 10,500 contracts. The Exchange believes that these
proposed increases are consistent with the gradual evolution cited by
the Commission, because the proposed levels represent reasonable
increases which are in line with prior changes.\6\
\6\ According to the PHLX, the most recent position limit
changes in 1993 represented changes of 38% (from 4,000 to 5,500
contracts); 25% (from 6,000 to 7,500 contracts); and 31% (from 8,000
to 10,500 contracts).
Third, the Exchange believes that the proposed increases are needed
by traders and investors. According to the PHLX, Exchange members and
customers have asked the Exchange to propose an increase in position
limits. The PHLX states that the requests have focused on the inability
of interested trading participants to meet their investment needs at
current position limit levels and the deleterious effect this inability
is having on these products. Based on such member and customer
requests, the Exchange has realized that the current position limit
levels discourage market participation by large investors and the
institutions that compete to facilitate the trading interests of large
investors.
Accordingly, the PHLX proposes to raise position limits to
accommodate the liquidity and hedging needs of large investors and the
facilitators of those investors. Specifically, certain institutional
traders handling industry funds deal in securities valued many times
higher than the maximum permissible position under PHLX rules.
In addition, the Exchange believes that the proposed limit of
6,000, 9,000, and 12,000 contracts should increase the depth and
liquidity of the markets for index options. The PHLX also believes that
higher position limits would further accommodate the hedging needs of
Exchange market makers and specialists, who are also restricted by
current levels.
The Exchange has considered the effects of increased position
limits on the marketplace, recognizing the purposes of these limits in
preventing manipulation and protecting against disruption of the
markets for both the option as well as the underlying security. The
PHLX notes that it nevertheless continues to monitor the markets for
evidence of manipulation or disruption caused by investors with
positions at or near current position or exercise limits and that the
new limits will not diminish the surveillance function in this regard.
Additionally, surveillance procedures have become increasingly
sophisticated and automated.
For these reasons, the Exchange believes that the proposal to
increase narrow-based index option position limits 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 and to prevent fraudulent and manipulative acts and
practices, as well as to protect investors and the public interest. The
Exchange believes that the proposal should remove impediments to and
perfect the mechanism of a free and open market by providing market
opportunity to investors constricted by current position limit levels.
The PHLX also believes that by stimulating market participation and
thereby increasing option market depth and liquidity, the proposed rule
change should promote just and equitable principles of trade. At the
same time, the PHLX believes that the proposed position limits should
continue to prevent fraudulent and manipulative acts and practices as
well as protect investors and the public interest by limiting the
ability to disrupt and manipulate the markets for options as well as
the underlying securities.
(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
No written comments were either received or requested.
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 reason 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 at 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 above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by June 6, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
\7\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-11945 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M
