[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Notices]
[Pages 32876-32878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16063]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37321; File No. SR-Phlx-96-21]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Index
Option Exercise Advices
June 18, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given
that on June 7, 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.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend
Exchange Rule 1042A, Exercise of Option Contracts, and Floor Procedure
Advice (``Advice'') G-1, to be retitled Index Option Exercise Advice
Forms, by requiring an index option exercise advice form for all non-
expiration exercises. In this manner, the Exchange will eliminate the
rule's current 25 contract threshold.
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
1. Purpose
Exchange Rule 1042A and Advice G-1 govern the exercise of index
options.\3\ Specifically, Exchange Rule 1042A(a)(i) requires that a
memorandum to exercise any American-style index option must be received
or prepared by the Phlx member organization no later than 4:30 p.m. on
the day of exercise.\4\ In addition, Exchange Rule 1042A(a)(ii) and
Advice G-1 require the submission of an exercise advice form to the
Exchange when exercising 25 or more American-style index option
contracts.
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\3\ The Exchange notes that with respect to index option
contracts, clearing members are also required to follow the
procedures of the Options Clearing Corporation (``OCC'') for
tendering exercise notices. Exercise notices are the exercise
instructions required by OCC and are distinct from exercise advices
which are required by Exchange rules.
\4\ See Securities Exchange Act Release No. 37077 (April 5,
1996), 61 FR 16156 (April 11, 1996) (File No. SR-Phlx-95-86). In
this regard, the Exchange has attempted to create a level playing
field among option investors by maintaining a cut-off time to ensure
that all exercise decisions occur promptly after the close of
trading. Consequently, to prevent fraud and unfairness, a long
option holder is prohibited from exercising index options on non-
expiration days based on information obtained after the cut-off.
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Pursuant to Exchange Rule 1042A(b), however, these requirements are
not applicable on the last business day before expiration.\5\ The above
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 Exchange Rule 1042, are not affected by this
rule proposal.
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\5\ See Securities Exchange Act Release No. 36903 (February 28,
1996), 61 FR 9001 (March 6, 1996) (File No. SR-Phlx-96-01).
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As stated above, the Phlx proposes to amend Exchange Rule 1042A and
Advice G-1 by requiring the submission of an index option exercise
advice form for all non-expiration exercises. In this manner, the
Exchange is eliminating the rule's current 25 contract threshold.
According to the Phlx, the purpose of this change is to enhance
surveillance efforts in determining compliance with the exercise cut-
off time. Currently, the submission of an exercise advice form where 25
or more contracts are exercised creates an audit trail for the Exchange
to examine when ascertaining compliance with the exercise cut-off time.
Thus, by eliminating the 25 contract threshold, all non-expiration
exercises will require the submission of an exercise advice form. By
providing a more complete audit trail for smaller exercises, the Phlx
believes that its surveillance efforts will be enhanced.
The Exchange also believes that eliminating the 25 contract
threshold should prevent the confusion associated with having to
calculate the number of index option contracts being exercised for each
Phlx index as exercise advices will be required for all non-expiration
exercises. In addition, the Exchange notes that the requirement of
Exchange Rule 1042A(a)(i) to prepare a memorandum to exercise pertains
to all non-expiration exercises, not just to those over 25 contracts.
Thus, according to the Phlx, because member organizations are already
preparing such memoranda, the additional preparation of an advice form
does not impose a substantial burden.
The Phlx notes that because Advice G-1 is based on Exchange Rule
1042A and contains certain pertinent provisions of the rule for easy
reference on the trading floor, specific reference to Exchange Rule
1042A is proposed to be added to Advice G-1.
The Phlx, in administering advices such as Advice G-1 as part of
its minor rule violation enforcement and reporting plan (``minor rule
plan''),\6\ understands that infractions cited pursuant to the plan are
minor in nature. Thus, in order to bolster the distinction between
minor and serious violations, the Phlx proposes that Advice G-1
expressly state that it is only intended to cover minor infractions.\7\
At the same time, however, the Exchange notes that it does not believe
that including certain provisions of Exchange Rule 1042A into Advice G-
1 deems all violations of Advice G-1 as minor. Exchange Rule 1042A was
intended to govern exercise memorandum and advice procedures in order
to prevent abuses and fraudulent activity; incorporating part of the
rule into an advice does not diminish this critical purpose. Rather, as
with many other important, substantive provisions in Exchange rules
that are codified into Advices,\8\ this system merely allows for the
efficient handling of minor violations.
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\6\ See Exchange Rule 970.
\7\ Advice G-1 states that the fine schedule provides sanctions
for infractions of the index option Exercise Advice Form procedures
which are minor in nature. Any violation of the procedure which has
been deemed serious by the Phlx will be referred directly to the
Exchange's Business Conduct Committee where stronger sanctions may
result. The Phlx notes, however, that this language does not affect
the other floor procedure advices administered pursuant to the plan
which do not specifically contain this statement; infractions cited
pursuant to the plan are minor in nature regardless of whether this
specific language was added to the advice.
\8\ See, e.g., Advice F-15 which pertains to the Exchange's
position and exercise limits.
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2. Statutory Basis
The Phlx believes that the proposed rule change is consistent with
Section 6(b) of the Act in general, and with
[[Page 32878]]
Section 6(b)(5) in particular,\9\ in that it is designed to prevent
fraudulent and manipulative acts and practices, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in, securities as well as to protect investors and the
public interest, by bolstering the exercise advice requirement to
include all non-expiration exercises, not just exercises of 25 or more
contracts. Specifically, the Phlx believes that requiring exercise
advices for all American-style index options exercised prior to
expiration should enhance surveillance efforts regarding compliance
with the exercise cut-off time by providing a more complete audit
trail.
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\9\ 15 U.S.C. Sec. 78f(b)(5)(1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The self-regulatory organization 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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 the 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the self-
regulatory organization. All submissions should refer to File No. SR-
Phlx-96-21 and should be submitted by July 16, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16063 Filed 6-24-96; 8:45 am]
BILLING CODE 8010-01-M
