[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34733-34735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16914]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38750; File No. SR-PHLX-97-04]
Self-Regulatory Organizations; Order Granting Partial Approval to
a Proposed Rule Change by the Philadelphia Stock Exchange, Inc.,
Modifying the Index Exercise Cut-Off Time
June 20, 1997.
I. Introduction
On January 8, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ On January 29, 1997, the Exchange filed Amendment No. 1
to the rule proposal.\3\ On April 4, 1997, the Exchange filed Amendment
No. 2 to the proposed rule change.\4\ On April 23, the Exchange filed
Amendment No. 3 to the proposed rule change.\5\ On May 23, 1997, the
Commission partially approved the proposed rule change, including
Amendment Nos. 1 and 2, thereby establishing a 4:02 p.m. close of
trading for equity options and narrow-based index options, and
modifying certain option trading rotation procedures.\6\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Theresa McCloskey, Exchange, to Janice Mitnick,
Commission, dated January 29, 1997. Amendment No. 1 was a technical
amendment.
\4\ Letter from Philip H. Becker, Exchange, to Michael A.
Walinskas, Commission, dated April 4, 1997. Amendment No. 2 proposed
a 4:02 p.m. close of trading for narrow-based index options and
modified option trading rotation procedures. Amendment No. 2
originally contained a proposal modifying Exchange index option
exercise cut-off procedures. However, this proposal was resubmitted
in Amendment No. 3, constituting a withdrawal of such proposal from
Amendment No. 2.
\5\ File No. SR-PHLX-97-04, Amendment No. 3, dated April 22,
1997. Amendment No. 3 proposes to amend rule 1042A and Floor
Procedure Advice G-1 to change the index option exercise cut-off
time from 4:30 p.m. (of 15 minutes after the close of trading if
trading is closed at a time other than the regular close of trading)
to five minutes after the close of trading. The proposal also
deletes the current requirement that member organizations must
accept exercise instructions until 4:15 p.m. each business day.
\6\ Release No. 34-38554 (May 23, 1997), 62 FR 29756 (June 2,
1997).
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Notice of the substance of Amendment No. 3 was provided by issuance
of a release \7\ and by publication in the Federal Register.\8\ Two
comment letters were received.\9\ This order approves the Amendment No.
3, permitting a change to the index option exercise cut-off time from
4:30 p.m. (or 15 minutes after the close of trading if trading is
closed at a time other than the regular close of trading) to five
minutes after the close of trading. As a result of the rule change, the
exercise cut-off time applicable to narrow-based (industry) index
options (which close at 4:02 p.m.) will be 4:07 p.m., and the cut-off
time applicable to broad-based (market) index options (which close at
4:15 p.m.) will be 4:20 p.m. The order also approves a deletion of the
current requirement that member organizations must accept exercise
instructions until 4:15 p.m. each business day.
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\7\ Securities Exchange Act Release No. 38554 (April 29, 1997).
\8\ 62 FR 24529 (May 29, 1997).
\9\ Letter form Michael Schwartz, Committee On Options
Proposals, to Jonathan Katz, Commission, dated January 10, 1997
(``CO-OP Letter'') (referencing Chicago Board Options Exchange, Inc.
(``CBOE''), American Stock Exchange, Inc. (``Amex''), and Pacific
Exchange, Inc. (``PCX'') proposals to establish a 4:02 p.m. trading
close for equity and narrow-based index options); letter from Gerald
D. O'Connell, Susquehanna Investment Group, Michael Walinskas,
Commission, dated May 28, 1997 (``Susquehanna Letter'').
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II. Description of the Proposal
The Exchange proposes to amend Rule 1042A and Floor Procedure
Advice G-1 to change the index option exercise cut-off time from 4:30
p.m. (or 15 minutes after the close of trading if trading is closed at
a time other than the regular close of trading) to five minutes after
the close of trading. The proposal would result in an exercise cut-off
time applicable to narrow-based index options (which close at 4:02
p.m.) of 4:07 p.m., and cut-off time applicable to broad-based index
options (which close at 4:15 p.m.) of 4:20 p.m.
Currently, Rule 1042A requires that a memorandum to exercise any
American-style index option must be received or prepared by the
Exchange member organization no later than 4:30 p.m., or 15 minutes
after the close of trading if the close occurs at a time other than the
regular close of trading.\10\ Further, Rule 1042A(a)(ii) currently
requires the submission of an Exercise Advice Form to the Exchange when
exercising American-style index option contracts.\11\
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\10\ Release No. 34-37077 (April 5, 1996), 61 FR 16156 (April
11, 1996) (Order approving SR-Phlx-95-86).
\11\ These requirements are currently not in effect on the last
business day before expiration, pursuant to Rule 1042A(b). Nor are
they applicable to European-style index options, which by definition
cannot be exercised prior to expiration.
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The Exchange states that in the process of reviewing and amending
its rules to provide for a 4:02 p.m. close for narrow-based index
options, it re-examined the reference in Rule 1042A to a 4:30 p.m.
exercise cut-off time. As a result of this re-examination, the Exchange
has proposed an exercise cut-off time for five minutes after the close
of trading to establish a cut-off time similar to that of the other
options exchanges.\12\
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\12\ See Amex Rule 980C(a)(i); CBOE Rule 11.1, Interpretations
and Policies .03(b); and PCX Rule 7.15.
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The proposal also would amend Rule 1042A to delete the requirement
that member organizations must accept exercise instructions until 4:15
p.m. each business day. Under the proposal, member organizations could
establish earlier cut-off times. The Exchange states that the purpose
of this change is to eliminate a restriction in its rules which the
CBOE and Amex do not have in their rules. The Exchange also states it
believes that it is appropriate for member organizations to determine
how best to comply with the Exchange's exercise cut-off time.
The Commission received two comment letters regarding the proposal
to change the index option exercise cut-off.\13\ The CO-OP Letter
supported a change in the Exchange's exercise cut-off, in order to
conform its rules with those of the other options exchanges. The
commenter suggested that such a change to the Exchange's exercise cut-
off would assist in ensuring that the Exchange's rule did not appear to
give professionals an advantage over public customers.
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\13\ CO-OP Letter and Susquehanna Letter, supra n.9.
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The Susquehanna Letter objected to the proposed reduction of the
exercise cut-off time from 4:30 p.m. to 4:07 p.m. The commenter stated
that such a change would have a negative impact on market makers'
ability to facilitate orders received near the close of trading. The
commenter also argued that the proposal would hinder market makers'
ability to effect the exercises necessary to control their risk and
stabilize their positions in preparation for the next day's trading.
Finally, the commenter argued that the change will provide an unfair
competitive advantage to broad-based index products.
The Exchange responded to the comment letter, stating that
[[Page 34734]]
notwithstanding the issues raised in the comment letter, it continues
to believe that the adoption of the rule proposal is appropriate.\14\
The Exchange reiterated its position that the basis of the proposal is
to conform the Exchanges rules to those of the other options exchanges.
In addition, the Exchange stated that the rule change has merit for
reasons other than establishing uniform options exercise deadlines. The
Exchange believes that the proposal will establish a deadline for
narrow-based index option exercise that is likely to precede most post-
4:00 p.m. news announcements, thereby assuring a level playing field
for both long and short investors in narrow-based index options.\15\
The Exchange also stated that different exercise cut-off times for
narrow-based index options and broad-based index options are unlikely
to confuse market participants or member firms because other options
exchanges have long operated with different closing times and exercise
cuts-off for narrow and broad-based index options.\16\
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\14\ Letter from Philip H. Becker, Exchange, to Michael
Walinskas, Commission, dated June 5, 1997.
\15\ The exercise of options after the close of stock trading as
a result of significant news announcements often can adversely
impact uncovered short investors in the affected options. For
instance, if a particular news announcement after the close of stock
trading has the effect of increasing an index level, uncovered short
call positions would bear a risk of being assigned without having
the ability to cover or offset their position until the market
reopens, potentially at a higher level.
\16\ The Exchange has notified its membership of this proposal,
and represents it will issue another notification to its membership
upon approval of proposal by the Commission.
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In addition, the Exchange noted that it has examined the impact of
the reduced exercise cut-off time on the risk assessment of its
specialists and market makers, and believes that Exchange market
professionals and market participants will still have adequate time to
assess their risk in deciding whether to exercise. The Exchange noted
that trading volume in such index options between 3:50 p.m. and the
close of trading should not unduly impede the ability of market
professionals to make these decisions. Finally, the Exchange indicated
that it will monitor the impact of this rule change on all market
participants to determine whether its implementation meets the desired
result.
III. Discussion
The Commission finds that the 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,
Section 6(b)(5).\17\ Section 6(b)(5) requires, among other things, that
the rules of an exchange be designed to promote just and equitable
principles of trade, perfect the mechanism of a free and open national
market, and, in general, to further investor protection and the public
interest.\18\
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\17\ 15 U.S.C. Sec. 78f(b)(5).
\18\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. Sec. 78c(f).
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The Commission believes that it is reasonable for the Exchange to
amend its rules to change the index option exercise cut-off time to
five minutes after the close of trading. The Commission notes that the
Exchange determined to revisit this issue\19\ in connection with its
earlier approved proposal to establish a 4:02 close of trading for
narrow-based index (and equity) options. The Exchange consulted
informally within its membership and other options industry members
through discussions with compliance, operations and trading
representatives of its member firms, the Committee on Options Proposals
(CO-OP), and the Options Clearing Corporation Roundtable in its re-
evaluation. As a result of this re-evaluation of appropriate exercise
cut-off procedures, the Exchange concluded that achieving uniformity
with the rules of the other options exchanges is desirable and
appropriate. As noted above, the Exchange's proposal for index exercise
cut-off is similar to the current practices of the CBOE, Amex, and the
PCX. In determining the appropriate exercise cut-off time, the Exchange
also specifically considered the amount of time market participants
will have to assess their risk in deciding whether to exercise against
the benefits of uniformity in rules among the options exchanges.
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\19\ See Release No. 34-37077 (April 5, 1996), 61 FR 16156
(April 11, 1996) (order approving SR-Phlx-95-86 extending the
exercise cut-off for narrow-based (American-style) index options
from 4:15 p.m. (five minutes after the close of trading) to 4:30
p.m.).
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The Commission has considered the issues raised in the proposal,
the comment letters, and the Exchange's response. The Commission
believes that the Exchange has adequately responded to the comments
raised in the comment letters. In addition, the Commission believes
that the proposal reflects a reasonable balance between the anticipated
benefits to the Exchange and the options industry as a whole that
should result from conforming its policy to that of the other options
exchanges, and the potential adverse impact of the proposal on certain
market participants. Specifically, the Commission concludes that a 4:07
p.m. exercise cut-off for narrow-based (American-style) index options
provides investors and other market participants with adequate time to
assess their risk in deciding whether to exercise long options
positions in such options. Moreover, the Commission does not believe
that different exercise cut-off times for narrow-based index options
and broad-based index options will create confusion for market
participants or member firms. Finally, the Commission does not believe
that the trading volume in narrow-based index options between 3:50 p.m.
and the close of trading will unduly impede the ability of market
professionals to make a decision as to whether to exercise.
The Commission also believes that it is reasonable for the Exchange
to amend Rule 1042A to delete the requirement that member organizations
must accept exercise instructions until 4:15 p.m. each business day,
permitting member organizations to establish earlier cut-off times. The
Commission notes that the CBOE and Amex rules do not contain such a
limitation. Further, the Commission believes the change will permit
member organizations to determine how best to comply with the
Exchange's exercise cut-off time.\20\
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\20\ The Commission notes that the Exchange represents it will
include in its notification to members covering the approval of this
proposal a provision indicating that members establishing customer
exercise cut-off limitations should take into account customers'
desires to maximize the time available to make an options exercise
determination. This goal should be balanced with the need of members
to have sufficient time to compile and relay exercise instructions
to the Exchange. Phone conversation between Edith Hallahan,
Exchange, and Michael Walinskas, Commission, June 19, 1997.
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It is contemplated that the Exchange will implement this rule
change on or about June 23, 1997.\21\
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\21\ Phone conversation between Edith Hallahan, Exchange and
Janice Mitnick, Commission, on May 23, 1997.
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IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Section 6 of
the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that Amendment No. 3 to the proposed rule change (SR-PHLX-97-
04) is hereby approved.
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\22\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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[[Page 34735]]
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16914 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M
