[Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17255]
[[Page Unknown]]
[Federal Register: July 15, 1994]
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SECUTITIES AND EXCHANGE COMMISSION
[Release No. 34-34345; File No. SR-Phlx-94-01]
Self Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment Nos. 1, 2, 3, and 4, and Notice of Filing and
Order Granting Accelerated Approval of Amendment No. 5 to the Proposed
Rule Change, by the Philadelphia Stock Exchange, Inc. Relating to the
Listing and Trading of Options on the Phone Index.
July 11, 1994
Introduction
On January 3, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange) submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to provide for the listing and trading of options
on the Phlx Phone Index (``Phone Index'' or ``Index''). On February 18,
1994, February 24, 1994, April 6, 1994, April 11, 1994, and July 5,
1994, the Exchange filed Amendment Nos. 1,\3\ 2,\4\ 3,\5\ 4,\6\ and
5,\7\ respectively, to this proposal.
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\1\15 U.S.C. Sec. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\In Amendment No. 1, the Phlx amended the proposal: (1) to
provide that the Index will be updated during the trading day at
least once every 15 seconds, rather than once every minute; (2) to
provide that the exercise prices will be set at five point Index
intervals rather than 2\1/2\ point Index intervals as stated in the
original filing; (3) to specify that the expiration cycle applicable
to options on the Index will be three expiration months from the
March, June, September, December cycle plus two additional near-term
months; (4) to clarify the Exchange's obligations with respect to
delisting and replacing components of the Index; (5) to clarify that
all of the proposed Index's component stocks are, and any future
replacement or added component securities will be, listed and traded
on either the New York Stock Exchange (``NYSE'') or the American
Stock Exchange (non-ECM) (``Amex''), or quoted on and traded through
the Nasdaq National Market (``Nasadaq/NM''); and (6) to clarify that
all of the current Index component stocks have overlying exchange-
traded options on them. See Letter from Michele R. Weisbaum,
Associate General Counsel, Phlx, to Sharon Lawson, Assistant
Director, Division of Market Regulation, Commission, dated February
16, 1994.
\4\In Amendment No. 2, the Phlx amended the proposal to change
the name of the Index from the Phlx Baby Bell Index to the Phlx
Phone Index. See Letter from Michele R. Weisbaum, Associate General
Counsel, Phlx, to Michael Walinskas, Staff Attorney, Division of
Market Regulation, Commission, dated February 24, 1994.
\5\In Amendment No. 3, the Phlx amended the proposal to
represent that the Phlx will submit a Rule 19b-4 filing to the
Commission prior to opening any new series of options on the Index
for trading if at any time less than 90 percent of the component
securities, by weight, are eligible for exchange options trading, or
if at any time the number of stocks in the Index increases to more
than ten or decreases to less than eight. See Letter from Michele R.
Weisbaum, Associate General Counsel, Phlx, to Sharon Lawson,
Assistant Director, Division of Market Regulation, Commission, dated
March 3, 1994.
\6\In Amendment No. 4, the Phlx amended the proposal: (1) to
change the manner in which the current Index value would be
calculated; (2) to represent that the surveillance procedures
currently used to monitor trading in each of the Exchange's other
index options, which include having complete access to trading
activity in the underlying securities comprising the Index (all of
which are traded on the NYSE), also will be used to monitor trading
in options on the Index; (3) to provide that the Intermarket
Surveillance Group Agreement dated July 14, 1983, as amended on
January 29, 1990, will be applicable to the trading of options on
the Index; and (4) to confirm that the trading hours for the Index
will be 9:30 a.m. to 4:10 p.m. (New York time). See Letter from
Michele R. Weisbaum, Associate General Counsel, Phlx, to Thomas
McManus, Division of Market Regulation, Commission, dated April 7,
1994.
\7\In Amendment No. 5, the Phlx amended its proposal to include
(1) the listing, pursuant to Phlx Rule 1101A(b)(iv), of quarterly
index options (``QIX options'') on the Phone Index; and (2) the
listing, pursuant to Phlx Rule 1101A(b)(iii), of series of long-term
options (``LEAPS'') on the Phone Index. See Letter from Michele R.
Weisbaum, Associate General Counsel, Phlx, to Thomas McManus,
Division of Market Regulation, Commission, dated July 1, 1994.
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The proposed rule change and Amendment Nos. 1, 2, 3, and 4 thereto
were published for comment in the Federal Register on June 6, 1994.\8\
No comments were received on the proposed rule change, nor the
amendments. This order approves the proposal and its five amendments.
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\8\See Securities Exchange Act Release No. 34130 (May 27, 1994),
59 FR 29317 (June 6, 1994).
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II. Description of Proposal
A. Composition of the Index
The Phlx proposes to list for trading options on the Phone Index, a
stock index to be calculated and maintained by the Phlx. The Index will
be composed of the common stocks of the eight companies created as a
result of the divestiture of American Telephone & Telegraph Co.
(``AT&T'') in 1983, including the seven regional telephone companies
spun off from AT&T as well as AT&T itself.\9\ AT&T and the spun-off
regional telephone companies represent some of the largest and most
widely-held U.S. common stocks. All eight of the common stocks are
listed on the NYSE. The Phlx will use a capitalization-weighted
methodology to calculate the Index.\10\
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\9\The components of the Index are: AT&T; Ameritech Corp.; Bell
Atlantic Corp.; BellSouth Corp.; Nynex Corp.; Pacific Telesis Group;
Southwestern Bell Corp.; and US West Inc.
\10\See infra Section II.C., entitled `'Calculation of the
Index,'' for a description of this calculation method.
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As of March 11, 1994, the market capitalizations of the individual
stocks in the Index ranged from a high of $68.7 billion (AT&T) to a low
of $15 billion (Nynex), with the mean and median being $27.6 billion
and $22.8 billion, respectively. The market capitalization of all the
stocks in the Index was $220.6 billion. The total number of shares
outstanding for the stocks in the Index ranged from a high of 1.4
billion shares (AT&T) to a low of 412.7 million shares (Nynex). In
addition, the average daily trading volume of the stocks in the Index,
for the six months immediately preceding February 24, 1994, ranged from
a high of 1,646,200 shares per day (AT&T) to a low of 425,100 shares
per day (BellSouth Corp.), with a mean of approximately 773,638 shares.
For the same period, the average monthly trading volume of the stocks
in the Index ranged from a high of 40,916,000 shares per month (AT&T)
to a low of 8,928,000 shares per month (BellSouth Corp.), with a mean
of approximately 17.03 million shares. Finally, no one stock comprised
more than 31.14 percent of the Index's total value as of March 11, 1994
(AT&T), and the percentage weighing of the four largest issues in the
Index accounted for 64.77 percent of the Index's value. The percentage
weighting of the lowest weighted stock was 6.78 percent of the Index
(Nynex), and the percentage weighting of the five smallest issues in
the Index accounted for 35.23 percent of the Index's value.
B. Maintenance
The Index will be maintained by the Phlx. The Phlx will make
special adjustments to the securities comprising the Index to reflect
such events as stock splits or reverse splits, spinoffs, stock
dividends, reorganizations, recapitalizations, and similar events, upon
their occurrence. In accordance with Phlx Rule 1009A, if any change in
the nature of any stock in the Index that is caused by delisting,
merger, acquisition, or otherwise occurs which would change the overall
market character of the Index, the Exchange will take appropriate steps
to delete this Index component stock from the Index. Such Index
component stock would be replaced by another Index component stock
which the Exchange in its discretion believes would be compatible with
the intended market character of the Index.\11\
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\11\The Exchange represents that any future replacement or added
component securities will be listed and traded on either the NYSE or
Amex, or quoted on and traded through the Nasdaq/NM. See supra note
3.
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If at any time less than 90 percent of the component stocks in the
Index, by weight, are eligible for exchange options trading, or if the
number of stocks in the Index ever increases to more than ten or
decreases to less than eight, the Exchange would submit a filing to the
Commission pursuant to Rule 19b-4 under the Act prior to opening any
new series of options on the Index for trading.
C. Calculation of the Index
The Index will be calculated using a capitalization-weighting
methodology. The representation of each security in the Index will be
proportional to the security's last sale price multiplied by the total
number of shares outstanding, in relation to the total market value of
all of the securities in the Index. The value of the Index was set to
equal 200 on December 1, 1993. As of June 24, 1994, the Index value was
196.73. The formula for calculating the Index value is as follows:
TN15JY94.011
Where:
Total Capitalization = Sum of Market Values (price x shares
outstanding) for all component securities
Divisor = The number which, when divided from the total capitalization
when the Index was initially calculated (on December 1, 1993), yielded
an Index value of 200.
The Index divisor will be adjusted for changes in the
capitalization of any of the component securities resulting from
mergers, acquisitions, delistings, substitutions, and other like
corporate events. The formula for adjusting the divisor is as follows:
TN15JY94.012
Adjustments in the value of the Index which are necessitated by the
addition and/or deletion of an issue from the Index are made by adding
and/or subtracting the market value (price x shares outstanding) of
the relevant issues.
The Index value will be updated dynamically and disseminated at
least once every fifteen seconds during the trading day.\12\ The Phlx
has retained Bridge Data, Inc. to compute and do all necessary
maintenance of the Index. 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 (``OPRA''). The
Index value also will be available on broker/dealer interrogation
devices to subscribers of the option information.
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\12\To the extent that a component stock does not open for
trading on a particular trading day, or trading in that component
stock is halted during the course of a particular trading day, the
last reported sale price of such security will be used for purposes
of calculating the current Index value.
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The Index value, for purposes of settling outstanding Index options
contracts upon expiration, will be calculated based upon the regular
way opening sale prices for each of the Index's component stocks on the
last trading day prior to expiration. Once all of the component stocks
have opened, the value of the Index will be determined and that value
will be sued as the final settlement value for expiring Index option
contracts. If any of the component stocks do not open for trading on
the last trading day before expiration, then the last reported sale
price of such security will be used in any case where that security
does not trade on that day.
D. Contract Specifications
The proposed options on the Index will be cash-settled. American-
style options.\13\ Standard options trading hours (9:30 a.m. to 4:10
p.m. New York time) will apply to the contracts. The Index multiplier
will be 100. Strike prices will be set at five point intervals in terms
of the current value of the index.\14\
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\13\An American-style option can be exercised at any time prior
to its expiration.
\14\Additional exercise prices will be added in accordance with
Phlx Rule 1101A(a).
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The Exchange will trade consecutive and cycle month series pursuant
to Phlx Rule 1101A. Specifically, there will be three expiration months
from the March, June, September, December cycle, plus two additional
near-term months so that the three nearest-term months always will be
available. In addition, pursuant to and in accordance with Phlx Rule
1101A(b)(iii), the Exchange will list and trade series of LEAPS on the
Index.
Index options will expire on the Saturday following the third
Friday of the expiration month. Since options on the Index will settle
based upon the opening prices of the component stocks on the last
trading day before expiration (normally a Friday), the last trading day
for an expiring Index option series will be the second to last business
day before expiration (normally a Thursday). Alternatively, pursuant to
Phlx Rule 1101A(b)(iv), the Exchange may provide for the listing of up
to eight near-term quarterly expirations for the Index. These QIX
options would expire on the first business day following the end of
each calendar quarter, and all such QIX options would be P.M.-
settled.\15\
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\15\See Securities Exchange Act Release No. 34234 (June 17,
1994), 59 FR 32729 (June 24, 1994), which approved the Exchange's
proposal to amend Phlx Rule 1101A to permit the Exchange to list QIX
options on all existing and future Exchange indexes (with each
listing of QIX options on future indexes subject to Commission
approval).
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E. Position and Exercise Limits, Margin Requirements, and Trading Halts
Position limits and exercise limits for the Index options will be
set at no more than 5,500 contracts.\16\ Index options will be traded
pursuant to the current Phlx rules governing the trading of index
options, particularly Phlx Rules 1000A through 1103A, and generally,
Phlx Rules 1000 through 1070. For example, Exchange rules applicable to
options on the Phone Index will be identical to the rules applicable to
other narrow-based index options for purposes of trading rotations,
halts, and suspensions,\17\ and margin treatment.\18\
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\16\See Phlx Rules 1001A(b)(i) and 1002A, respectively.
\17\See Phlx Rule 1047A.
\18\See Phlx Rules 722 and 1000A.
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F. Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other index options to monitor
trading in Phone Index options. These procedures include complete
access to trading activity in the underlying securities. Further, 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.\19\
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\19\The Exchange is a member of the ISG, which was formed on
July 14, 1983, among other things, to coordinate more effectively
surveillance and investigative information sharing arrangements in
the stock and options markets. See Intermarket Surveillance Group
Agreement, July 14, 1983. The most recent amendment to the ISG
Agreement, which incorporates the original agreement and all
amendments made thereafter, was signed by ISG members on January 29,
1990. See Second Amendment to the Intermarket Surveillance Group
Agreement, January 29, 1990.
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III. Commission Findings and Conclusions
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).\20\ Specifically, the
Commission finds that the trading of Phone Index options will serve to
promote the public interest and help to remove impediments to a free
and open securities market by providing investors with a means of
hedging exposure to market risk associated with U.S. telephone industry
stocks.\21\
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\20\15 U.S.C. 78f(b)(5) (1988).
\21\Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new option proposal upon a finding that
the introduction of such new derivative instrument is in the public
interest. Such a finding would be difficult for a derivative
instrument that served no hedging or other economic function,
because any benefits that might be derived by market participants
likely would be outweighed by the potential for manipulation,
diminished public confidence in the integrity of the markets, and
other valid regulatory concerns. In this regard, the trading of
listed index options on the Phone Index will provide investors with
a hedging vehicle that should reflect the overall movement of
telephone industry stocks in the U.S. securities markets. The
Commission also believes that these Index options will provide
investors with a means by which to make investment decisions in this
sector of the U.S. securities markets, allowing them to establish
positions or increase existing positions in such markets in a cost-
effective manner.
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A. Index Design and Structure
The Commission finds that the Phone Index is a narrow-based index.
The Phone Index is composed of only eight securities, all of which are
U.S. telephone industry stocks. Accordingly, the Commission believes
that it is appropriate for the Phlx to apply its rules governing
narrow-based index options to trading in the Index options.\22\
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\22\See supra notes 13 through 15, and accompanying text.
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The Commission also finds that the large capitalizations, liquid
markets, and relative weightings of the index's component securities
significantly minimize the potential for manipulation of the Index.
First, the majority of the components that comprise the Index are
actively-traded, with a mean and median average daily trading volume of
773,800 and 637,700 shares, respectively, over the six months
immediately preceding February 24, 1994.\23\ Second, the market
capitalizations of the securities in the Index are very large, ranging
from a high of $68.7 billion to a low of $15 billion, as of March 11,
1994, with the mean and median being $27.6 billion and $22.8 billion,
respectively. Third, although the Index is only comprised of eight
component securities, no one particular security or group of securities
dominates the Index. Specifically, no individual stock comprises more
than 31.15 percent of the Index's total value, and the percentage
weighting of the four largest issues in the Index accounts for 64.77
percent of the Index's value.\24\ Fourth, all of the securities in the
Index are eligible for standardized options trading, and the proposed
Phlx maintenance requirement requires that at least 90 percent of the
weighting of the Index be comprised of securities that are eligible for
exchange options trading. Fifth, if the Phlx increases the number of
component securities to more than ten or decreases that number to less
than eight, the Phlx will be required to seek Commission approval
pursuant to Section 19(b)(2) of the Act before listing new strike price
of expiration month series of Phone Index options. This will help
protect against material changes in the composition and design of the
Index that might adversely affect the Phlx's obligations to protect
investors and to maintain fair and orderly markets in Index options.
Finally, the Index is comprised, and in the future may only be
comprised, of stocks listed and traded on the NYSE or Amex, or quoted
on and traded through the Nasdaq/NM. Accordingly, the Phlx will be
required to ensure that each component of the Index is subject to last
sale reporting requirements in the United States. This will further
reduce the potential for manipulation of the value of the Index.
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\23\In addition, over this same period, no component of the
Index had an average daily trading volume of less than 425,100
shares per day.
\24\The Commission's analysis is based on the eight securities
in the Index. For an index with several more underlying securities,
the Commission might come to a different conclusion if only a few
securities accounted for a substantial portion of the index's
weighting. In addition, although the Index is comprised of only
eight stocks, the Commission is satisfied that, based on the large
capitalizations, liquidity, and relative weightings of the component
securities, the Index can be traded as an index product.
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B. Surveillance
The Commission believes that a surveillance sharing agreement
between an exchange proposing to list a security index derivative
product and the exchange(s) trading the securities underlying the
derivative product is an important measure for surveillance of the
derivative and underlying securities markets. Such agreements ensure
the availability of information necessary to detect and deter potential
manipulations and other trading abuses, thereby making the security
index product less readily susceptible to manipulation.\25\ In this
regard, the NYSE, which currently is the primary market for all of the
stocks comprising the Index, is a member of the ISG, which provides for
the exchange of all necessary surveillance information.\26\
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\25\See Securities Exchange Act Release No. 31243 (September 28,
1992), 57 FR 45849 (October 5, 1992).
\26\See supra note 16. In addition, the Amex and the National
Association of Securities Dealers, Inc. are members of the ISG.
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C. Market Impact
The Commission believes that the listing and trading on the Phlx of
options on the Phone Index will not adversely impact the underlying
securities markets.\27\ First, as described above, for the most part no
one security or group of securities dominates the Index. Second,
because at least 90 percent of the numerical value of the Index must be
accounted for by securities that meet the Exchange's options listing
standards, the component securities generally will be actively-traded,
highly-capitalized securities. Third, the 5,500 contract position and
exercise limits applicable to Index options will serve to minimize
potential manipulation and market impact concerns.
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\27\In addition, the Phlx has represented that the Phlx and OPRA
have the necessary systems capacity to support those new series of
index options that would result from the introduction of options on
the Phone Index. See Letter from Michele R. Weisbaum, Associate
General Counsel, Phlx, to Thomas McManus, Division of Market
Regulation, Commission, dated June 24, 1994; and Letter from Joseph
P. Corrigan, Executive Director, OPRA, to Richard Cangelosi,
Assistant Vice President, New Product Development, Phlx, dated April
18, 1994.
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Lastly, the Commission believes that settling expiring Phone Index
options based on the opening prices of component securities is
consistent with the Act. As noted in other contexts, valuing options
for exercise settlement on expiration based on opening prices rather
than closing prices may help reduce the ``Expiration Friday'' effects
on markets for securities underlying options on the Index.\28\
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\28\See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992).
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D. Accelerated Approval of Amendment No. 5
The Commission finds good cause for approving Amendment No. 5 to
the proposed rule change prior to the thirtieth day after the date of
publication on notice of filing thereof in the Federal Register. The
portion of Amendment No. 5 providing for the listing of QIX options on
the Index is consistent with the Exchange proposal approved by the
Commission on June 17, 1994 relating to the listing of QIX options on
all stock indexes for which index options are listed for trading by the
Exchange.\29\ That proposal was published for the full 21-day comment
period, and no comments were received. In addition, because Phlx Rule
1101A(b)(iii) generally permits the Exchange to list series of LEAPS on
stock indexes, the Commission finds that the portion of Amendment No. 5
relating to the listing of series of LEAPS on the Index presents no new
regulatory issues. Accordingly, the Commission believes it is
consistent with Section 6(b)(5) of the Act to approve Amendment No. 5
on an accelerated basis.
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\29\See supra note 15.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 5 to the proposed rule change.
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 submission, all subsequent
amendments, all written statements with respect to the foregoing that
are filed with the Commission, and all written communications relating
to the foregoing 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 in the Commission's Public Reference Section, 450 Fifth Street
NW., Washington, DC. Copies of such filing also will be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-Phlx-94-01 and should be submitted by August 5, 1994.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposed rule change (File No. SR-Phlx-94-01), as
amended, is approved.
\30\15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\31\
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\31\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-17255 Filed 7-14-94; 8:45 am]
BILLING CODE 8010-01-M
