[Federal Register Volume 63, Number 110 (Tuesday, June 9, 1998)]
[Notices]
[Pages 31543-31545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15278]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40058; File No. SR-Phlx-98-21]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Philadelphia Stock
Exchange, Inc. Relating to the Listing and Trading of Options on the
Over-The-Counter Prime Index
June 2, 1998.
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 May 15, 1998, 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 Phlx.
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. 78s(b)(1).
\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 proposes to list and trade European style, cash-settled
options, including long term options,\3\ on the Over-The-Counter Prime
Index \4\ (``OTC Prime Index'' or ``Index''), a price weighted, A.M.
settled index composed of fifteen \5\ stocks which are considered the
``most active'' \6\ stocks traded on the Nasdaq market.
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\3\ See Phlx Rule 1101A(b)(iii). Long term options are also
known as LEAPs.
\4\ The Exchange submitted a pre-filing on April 30, 1998 in
accordance with the Generic Index Approval Order. See Generic Index
Approval Order, infra note 7. Since the pre-filing the Exchange has
changed the name of the Index from the ``Over-The-Counter Most
Active Index'' to the ``Over-The-Counter Prime Index'' and the
trading symbols have changed. However, the Exchange represents that
none of the other contract specifications have been modified since
the pre-filing.
\5\ Since the pre-filing on April 30, 1998, the Exchange added
three stocks to the Index increasing the number of components in the
Index from 12 to 15 in order to alleviate concerns regarding the
concentration of the five highest-weighted securities.
\6\ Most active is defined as those underlying securities which
had the largest trading volume in the previous year.
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The Exchange is filing this proposal pursuant to Phlx 1009A(b)
which provides for the commencement of trading of options on the Index
thirty (30) days after the date of this filing. The Exchange believes
the proposal is in compliance with Rule 1009A(b) and the standards
approved in the Generic Index Option Approval Order (``Generic Index
Approval Order'').\7\
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\7\ See Securities Exchange Act Release No. 34157 (June 3, 1994)
59 FR 30062 (June 10, 1994) (order approving File Nos. SR-Amex-92-
35; SR-CBOE-93-59; SR-NYSE-94-17; SR-PSE-94-07; and SR-Phlx-94-10).
The Generic Index Approval Order established generic listing
standards for options on narrow-based indexes and adopted
streamlined procedures for introducing trading in options satisfying
the generic listing standards.
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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 Phlx 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 Phlx 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
The purpose of the proposed rule change is to list for trading
European style, cash-settled options on the OTC Prime Index, a new
index developed by the Exchange pursuant to Rule 1009A(b) in accordance
with the Generic Index Approval Order for the listing and trading of
narrow-based index options. Options on this Index will provide a
hedging vehicle for a group of some of the most active securities
traded on the Nasdaq market. In order to assure that the Index reflects
the most active securities traded on the Nasdaq market, the Index will
be rebalanced annually to reflect the previous year's fifteen most
actively traded issues.
Pursuant to Rule 1009A, (1) the options on the Index will be A.M.
settled; (2) the Index is price weighted; (3) no one component security
will represent more than 25% of the weight of the Index, and the five
highest weighted component securities in the Index do not in the
aggregate account for more than 60% of the weight of the Index; (4)
each of the component securities has a minimum market capitalization of
a least $75 million and has a trading volume in each of last six months
of not less than 1,000,000 shares; (5) all of the components of the
Index meet the current criteria for standardized options trading set
forth in Exchange Rule 1009 and are currently the subject of listed
options on U.S.
[[Page 31544]]
options exchanges; (6) the Index contains no American Depositary
Receipts (``ADRs''); and (7) all component stocks are listed on the
Nasdaq and are reported National Market System securities pursuant to
Rule 11Aa3-1 of the Act.\8\
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\8\ 17 CFR 240.11Aa3-1.
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The OTC Prime Index value will be disseminated every 15 seconds
during the trading day. The Phlx has retained Bridge Data Inc. to
compute and do all necessary maintenance of the Index.\9\ Pursuant to
Phlx Rule 1100A, updated Index values will be disseminated and
displayed by means of primary market prints reported by the
Consolidated Tape Association and over the facilities of the Options
Price Reporting Authority. The Index value will also be available on
broker-dealer interrogation devices to subscribers of options
information. The Exchange represents that both the Exchange and the
Options Price Reporting Authority \10\ have the necessary systems
capacity to handle the additional traffic of the OTC Prime Index.
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\9\ As a back-up to Bridge Data Inc., the Phlx will utilize its
own internal index calculation system called the Index Calculation
Engine (``ICE'') System.
\10\ See Letter from Joe Corrigan, Executive Director, Options
Price Reporting Authority to Michael Walinskas, Senior Special
Counsel, Division, Commission, dated May 4, 1998.
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As of May 13, 1998, the market capitalization of all the stocks in
the Index exceeded $680 billion and such individual capitalizations
ranged from $3 billion (Quantum Corporation) to $214 billion (Microsoft
Corporation). All fifteen component issues in the Index had average
daily trading volumes in excess of one million shares over the past six
months. The Exchange believes the component issues are some of the most
widely-held and highly-capitalized common stocks.
Ticker Symbol: OTX.
Settlement Symbol: OTS.
Index Calculation: The Index is a price weighted index. To compute
the Index value, the following formula would be used:
[GRAPHIC] [TIFF OMITTED] TN09JN98.000
Where: SP=current stock price
The Initial divisor in an arbitrary number set to achieve a certain
index value. The divisor for this Index will be 4.0 will result in an
Index value of 188.70 on May 13, 1998. Index Maintenance: To maintain
the continuity of the Index, the divisor will be adjusted to reflect
non-market changes in the price of the component securities as well as
changes in the composition of the Index. Changes which may result in
divisor adjustments include, but are not limited to, stock splits,
dividends, spin-offs, mergers and acquisitions. In accordance with Rule
1009A, if any change in the nature of any component (e.g., delisting,
merger, acquisition or otherwise) in the Index will change the overall
market character of the Index, the Exchange will take appropriate steps
to remove the stock or replace it with another stock that the Exchange
believes would be compatible with the intended character of the Index.
Any replacement components will be reported securities as defined in
Rule 11Aa3-1 of the Act.\11\ The Index will be rebalanced on an annual
basis to reflect the previous year's fifteen most active issues traded
on the over-the-counter market.
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\11\ 17 CFR 240.11Aa3-1.
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Pursuant to Rule 1009(c)(2), the Exchange will not increase to more
than 20 or decrease to less than 10, the number of components
comprising the Index during the year. However, at the end of the
calendar year the Index will be rebalanced in order to reflect fifteen
of the most actively traded issues from the previous year. The Exchange
maintains that the component stocks comprising the top 90% of the
Index, by weight, will each maintain a minimum market capitalization of
$75 million. The remaining 10%, by weight, will each maintain a minimum
market capitalization of $50 million. The component stocks comprising
the top 90% of the Index, by weight, will maintain a trading volume of
at least 500,000 shares per month. The trading volume for each of the
component stocks constituting the bottom 10% of the Index, by weight,
will maintain an average trading volume of at least 400,000 shares per
month. No fewer than 90% of the component issues by weight or fewer
than 80% of the total number of the components qualify as stocks
eligible for options trading. In addition to the maintenance criteria
above, no single component of the Index shall account for more than 25%
of the Index and the five highest weighted component securities shall
not account for more than 60% of the Index.\12\
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\12\ If the concentration of the five highest-weighted
securities increase to above 60%, then the Exchange warrants that it
will increase the number of components in the Index to 16
components. The Exchange will monitor the concentration of the top
five components in the Index on a monthly basis.
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If the Index fails at any time to satisfy one or more of the
required maintenance criteria, the Exchange will notify the Commission
staff immediately of that fact and will not open for trading any
additional series of options on the Index, unless the above is
determined by the Exchange not to be significant and the Commission
concurs in that determination, or unless the continued listing of
options on the OTC Prime Index has been approved by the Commission
under Section 19(b)(2) of the Act.\13\ In addition to not opening for
trading any additional series, the Exchange may, in consultation with
the Commission, prohibit opening purchase transactions in series of
options previously opened for trading to the extent that the Exchange
deems such action necessary or appropriate.\14\ The components which
are substituted in the Index will comply with the maintenance
requirements above.
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\13\ See Phlx Rule 1009A.
\14\ See Phlx Rule 1010
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Unit of Trading: Each options contract will represent $100, the
Index multiplier, times the Index value. For example, an Index value of
200 will result in an option contract value of $20,000 (100 x 200).
Excercise Price: The exercise prices will be set in accordance with
Phlx Rule 1101A(a).
Settlement Value: Because all of the components are national Market
Securities traded through Nasdaq, the first reported sale price will be
used for the final settlement value for expiring Index option
contracts. In the event that a component security does not open for
trading on the last day before the expiration of a series of Index
options, the previous day's first reported sale price for that security
will be used in calculating the Index value. However, in the event that
the Options Clearing Corporation (``OCC'') determines that the current
Index value is unreported or otherwise unavailable (including instances
where the primary market for securities representing a substantial part
of the value of the Index is not open for trading at the time when the
current Index value used for exercise settlement purposes would be
determined), the OCC shall determine an exercise settlement amount for
the Index in accordance with Article XVII, Section 4 of the OCC By-
laws.\15\
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\15\ See e.g., OCC Article XVII, Section 4 and Securities
Exchange Act Release No. 37315 (June 17, 1996) 61 FR 32471 (June 24,
1996) (order approving File No. SR-OCC-95-19).
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Last Trading Day: The last business day prior to the third Friday
of the month for options which expire on the Saturday following the
third Friday of that month.
Trading Hours: 9:30 a.m. to 4:02 p.m. EST.
Position and Exercise Limits: Pursuant to Phlx Rules 1001A(b)(i)
and 1002A,
[[Page 31545]]
the position and exercise limits will be 12,000 contracts.
Expiration Cycles: Three months from the March, June, September,
December cycle plus at least two additional near-term months. LEAPs may
also be traded on the Index pursuant to Phlx Rule 1101A(b)(iii).
Exercise Style: European.
Premium Quotations: Premiums will be expressed in terms of dollars
and fractions of dollars pursuant to Phlx Rule 1033A. For example, a
bid or offer of 1\1/2\ will represent a premium per options contract of
$150 (1\1/2\ x 100).
The options will be traded pursuant to current Phlx rules governing
the trading of index options including provisions addressing sales
practices, floor trading procedures, position and exercise limits,
margin requirements and trading halts and suspensions.\16\ The Exchange
also represents that surveillance procedures currently used to monitor
trading in index options will be applicable to this Index. These
procedures include having complete access to trading activity in the
underlying securities which are all traded on Nasdaq. In addition, the
Intermarket Surveillance Group (``ISG'') Agreement dated July 14, 1983,
as amended on January 29, 1990, will be applicable to the trading of
options on the Index.
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\16\ See, Phlx Rule 722, Phlx Rules 1000A through 1102A and
generally Phlx rules 1000 through 1072.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \17\ in general, and in particular with
Section 6(b)(5),\18\ in that it is designed to promote just and
equitable principles of trade, 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 to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, as well as to protect investors and the
public interest by providing a hedging vehicle for the group of 15 of
the most actively-traded securities on the Nasdaq market.
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\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(5).
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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 solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The foregoing rule change constitutes a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule of the Exchange, and therefore, has
become effective pursuant to Section 19(b)(3)(A) of the Act \19\ and
paragraph (e) of Rule 19b-4 thereunder.\20\ At any time within 60 days
of the filing of the proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act
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\19\ 15 U.S.C. 78S(b)(3)(A).
\20\ 17 CFR 240.19b-4.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies
of the submissions, 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 Room, 450 Fifth Street, NW, Washington,
DC 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 File No. SR-Phlx-98-21 and should be submitted by June 30,
1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15278 Filed 6-8-98; 8:45 am]
BILLING CODE 8010-01-M
