[Federal Register Volume 61, Number 124 (Wednesday, June 26, 1996)]
[Notices]
[Pages 33162-33163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16229]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37334; File No. SR-Phlx-96-03]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 2 thereto by the Philadelphia Stock Exchange, Inc.
Relating to Component Additions to the Phlx Gold/Silver Index
June 19, 1996.
On April 1, 1996, 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 revise the composition of the
Phlx Gold/Silver Index (``XAU'' or ``Index'') by adding three
underlying stocks and to adopt procedures to address replacements,
additions and deletions of component stocks. On April 16, 1996, the
Exchange filed Amendment No. 1 to the proposal.\3\ Notice of the
proposal was published for comment and appeared in the Federal Register
on April 25, 1996.\4\ No comment letters were received on the proposal.
On June 5, 1996, the Exchange filed Amendment No. 2 to the proposal.\5\
This order approves the Phlx's proposal as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1 the Phlx states that the Index is
currently a P.M.-settled index and that it proposes to apply all of
the maintenance criteria of Phlx Rule 1009(A)(c) except the
requirement that the Index be designated as A.M.-settled. See letter
from Michele R. Weisbaum, Associate General Counsel, Phlx, to James
T. McHale, Attorney, Office of Market Supervision (``OMS''),
Division of Market Regulation (``Division''), Commission, dated
April 16, 1996 (``Amendment No. 1'').
\4\ See Securities Exchange Act Release No. 37123 (April 18,
1996), 61 FR 18454 (April 25, 1996).
\5\ In Amendment No. 2, the Exchange states that it has received
oral comments that AMAX Gold Inc. (AU) would not be an appropriate
stock to include in the XAU as it is not actually a gold or silver
mining stock, but more of a ferrous metal company stock.
Accordingly, the Exchange wishes to withdraw the proposed addition
of AU to the Index. See Letter from Michele R. Weisbaum, Associate
General Counsel, Phlx, to James T. McHale, Attorney, OMS, Division,
Commission, dated May 15, 1996 (``Amendment No. 2'').
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I. Description of the Proposal
The XAU is a capitalization weighted index currently composed of
the stocks of nine widely held U.S. companies in the gold and silver
mining industry. Options on the Index have an American style expiration
and the settlement value is based on the closing values of the
component issues on the day exercised or on the last trading day prior
to expiration (i.e. ``P.M.-settled''). The Index was the first narrow-
based or industry index approved for trading on the Exchange.\6\
Pursuant to Footnote 10 to the Index Approval Order,\7\ the Exchange
previously agreed to submit to the Commission, pursuant to Rule 19b-4
under the Act, any changes to the stocks comprising the Index and to
attempt to formulate a rule that would govern this process.
Accordingly, pursuant to this rule filing, the Exchange is requesting
approval to change the composition of the XAU by adding two stocks. The
stocks are Santa Fe Pacific Gold Corp. (GLD) and TVX Gold Inc. (TVX)
and they both currently trade on the New York Stock Exchange.\8\ The
Exchange believes that the addition of these two stocks will help
ensure an even more accurate response to overall market activity in the
precious metals mining industry. The Phlx represents \9\ that the
proposed change would increase the total capitalization of the Index
from $28.63 billion to $34.01 billion. The two additional stocks
combined will account for 10.19% of the revised Index by capitalization
weight. The value of the XAU as of the close of trading on March 28,
1996 was 143.83.
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\6\ See Securities Exchange Act Release No. 20437 (December 2,
1983) 48 FR 55229 (December 9, 1983) (``Index Approval Order'').
\7\ Id.
\8\ According to the Exchange, as of May 14, 1996, the
capitalizations of Santa Fe Pacific Gold Corp. and TVX Gold Inc.
were approximately $2 billion and $1.46 billion respectively.
\9\ The following data is based on prices and shares outstanding
as of May 14, 1996.
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The Exchange also proposes to adopt a procedure which will govern
future replacements, additions or deletions of underlying stocks from
the Index. If at any time a stock is deleted from the Index due to
merger, acquisition or otherwise, and the Exchange determines to
replace it, the Phlx will take into account the capitalization,
liquidity, volatility and name recognition of any proposed replacement
stock which fits the character of the Index. Moreover, the Phlx will
ensure that the Index meets all of the maintenance criteria in Rule
1009A(c) \10\ except the requirement that the Index be A.M.-
settled.\11\ The Phlx notes that this maintenance criteria, in part,
requires it to ensure that no fewer than 90% of the stocks comprising
the Index by weight, nor fewer than 80% of the total number of stocks
in the Index,
[[Page 33163]]
qualify as eligible for equity options trading under Phlx Rule
1009.\12\ Absent Commission approval, the Exchange will not increase to
more than 15, nor decrease to fewer than 9, the number of stocks in the
Index.
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\10\ The maintenance criteria set forth in Rule 1009A(c) are
principally designed as index maintenance criteria that are required
to be met by certain narrow-based index option products that were
listed pursuant to Rule 1009A(b). Rule 1009A(c), among other things,
requires that for a capitalization weighted index, the lesser of the
five highest weighted component securities in the index or the
highest weighted component securities in the index that in the
aggregate represent at least 30% of the total number of stocks in
the index each have an average monthly trading volume of at least
1,000,000 shares over the past six months. Rule 1009A(c) also
requires each component security to have a market capitalization of
at least $75 million, except that for each of the lowest weighted
component securities in the index that in the aggregate account for
no more than 10% of the weight of the index, the market
capitalization is at least $50 million. See Securities Exchange Act
Release No. 34157 (June 3, 1994), 59 FR 30062 (June 10, 1994).
\11\ See Amendment No. 1, supra note 3. The settlement value of
an A.M.-settled index is based on the opening prices of the
component securities, in contrast to a P.M.-settled index, which is
based on closing prices. As mentioned above, the XAU is a P.M.-
settled index.
\12\ The two new stocks proposed to be added herein both
currently have overlying options being traded.
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II. 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, the requirements of Section 6(b)(5) \13\ in that it is
designed to prevent fraudulent and manipulative acts and practices, to
help remove impediments to a free and open securities market and
facilitate transactions in securities, while protecting investors and
the public interest. Specifically, the Commission believes that adding
to the XAU two relatively highly capitalized and actively traded
precious metal mining stocks should result in the Index being more
representative of the gold and silver mining industries.\14\ Moreover,
the greater number of securities in the Index should reduce the
potential for manipulation to the Index, which will serve to protect
investors and the public interest.
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\13\ 15 U.S.C. 78f(b)(5).
\14\ See note 8 supra.
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With regard to the Exchange's proposed procedure for governing
future replacements, additions or deletions of underlying stocks from
the Index, the Commission finds that the procedure is appropriate and
consistent with the Act. More specifically, the Phlx has undertaken to
ensure that the XAU will satisfy the maintenance criteria set forth in
Exchange Rule 1009A(c),\15\ governing certain narrow-based index
options. As noted above, these criteria contain minimum numerical
requirements for, among other things, trading volume and capitalization
which will help to ensure that the components of the Index have
sufficient depth and liquidity to accommodate options trading. Given
that the Index is an industry index with relatively few components, the
Commission believes that applying these maintenance criteria is an
appropriate means of ensuring that the Index continues to reflect a
bona fide narrow-based index. Additionally, the Commission concludes
that the Phlx's proposal as a whole satisfies the Commission's request
in the original Index Approval Order \16\ that the Exchange formulate a
rule to govern replacements of stocks in the Index. Based on the above,
the Commission believes this portion of the proposal will help to
facilitate transactions in securities while protecting investors and
the public interest.
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\15\ The XAU contract, however, will not meet the requirement
that the Index be A.M.-settled. See Amendment No. 1, supra note 3.
The Commission continues to believe that basing the settlement of
index products on opening, as opposed to closing, prices helps to
alleviate stock market volatility on Expiration Fridays and the
Commission encourages the Phlx to consider changing the XAU to an
A.M.-settled index. Nevertheless, because options on the Index have
been trading as P.M.-settled since inception of the Index, and
because the Index is comprised of a small number of securities, the
Commission is not at this time requiring the Phlx to make such a
change.
\16\ See supra note 6.
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The Commission finds good cause for approving Amendment No. 2 to
the proposal prior to the thirtieth day after the date of publication
of the notice of filing thereof in the Federal Register. Specifically,
Amendment No. 2 merely removes one of the proposed Index stocks which,
according to the Exchange, was not an accurate representative of the
gold/silver mining industry. The amendment does not raise significant
issues or otherwise materially impact the proposal. Indeed, the overall
initial effect of the proposal is to increase the number of component
stocks in the Index from 9 to 11, which, given the capitalization and
trading history of the two additional components, strengthens the
Index.
Based on the above, the Commission finds good cause for approving
Amendment No. 2 to the proposed rule change on an accelerated basis and
believes that the proposal, as amended, is consistent with Sections
6(b)(5) and 19(b)(2) of the Act.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2. 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. 20549. Copies of such filing will also be
available for inspection and copying at the principal office of the
Phlx. All submissions should refer to the File No. SR-Phlx-96-03 and
should be submitted by July 17, 1996.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-Phlx-96-03), as amended, is
approved.
\17\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16229 Filed 6-25-96; 8:45 am]
BILLING CODE 8010-01-M
