[Federal Register Volume 59, Number 139 (Thursday, July 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17761]
[[Page Unknown]]
[Federal Register: July 21, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34387; File No. SR-PHLX-94-03]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment
Nos. 1 and 2 by the Philadelphia Stock Exchange, Inc., Relating to
Listing of Reduced-Value Long-Term Options on the National Over-the-
Counter Index
July 15, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January
12, 1994, the Philadelphia Stock Exchange, Inc. (``PHLX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization.\1\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\On March 1, 1994, the PHLX amended PHLX Rule 1001A,
``Position Limits,'' to add paragraphs (d)(i) and (ii), which
describe the aggregation procedures for quarterly expiring options,
reduced-value long-term Value Line Composite Index options, and
reduced-value long-term National Over-the-Counter Index options. See
Letter from Edith Hallahan, Special Counsel, PHLX, to Sharon Lawson,
Assistant Director, Division of Market Regulation (``Division''),
Commission, dated February 28, 1994 (``Amendment No. 1''). After the
provisions proposed in paragraph (d)(i) were approved in Securities
Exchange Act Release No. 34234 (June 17, 1994), the PHLX deleted
paragraph (d)(i) from the current proposal. See Letter from Edith
Hallahan, Special Counsel, PHLX, to Mike Walinskas, Branch Chief,
Options Regulation, Division, Commission, dated July 13, 1994
(``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PHLX proposes to amend its rules to list long-term reduced-
value options equal to one-tenth the value of the Exchange's current
National Over-the-Counter Index (``Index'' or ``XOC''). Options on the
long-term, reduced-value XOC (``reduced-value XOC'') will have
expirations of up to 36 months. For aggregation purposes, 10 reduced-
value long-term XOC options are the equivalent of one full-value XOC
contract.
The text of the proposed rule change is available at the Office of
the Secretary, PHLX, and at the Commission.
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. Description of the Proposal
Since 1985 the PHLX has been trading options on the XOC, a broad-
based, capitalization-weighted index comprised of the 100 largest
domestic corporations whose stocks are traded over-the-counter
(``OTC'') by at least four market makers and are not listed on any
exchange.\2\ All of the XOC's component stocks are traded through the
National Association of Securities Dealers Automated Quotations
(``NASDAQ'') system and are National Market Securities (``NMS''). On
February 26, 1991, the Commission approved a proposed rule change, SR-
PHLX-90-38, allowing the Exchange to list long-term options having up
to 36 months to expiration on any of the Exchange's broad-based index
options.\3\
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\2\See Securities Exchange Act Release No. 22044 (May 17, 1985),
50 FR 21532 (May 24, 1985).
\3\See Securities Exchange Act Release No. 28910 (February 26,
1991), 56 FR 9032 (March 4, 1991).
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The PHLX proposes to list long-term options on a reduced-value XOC
index that would be computed at one-tenth the value of the Exchange's
current XOC index. The proposed options will have expirations of up to
36 months. The PHLX believes that the listing of long-term, reduced-
value XOC options will provide retail investors with the opportunity to
obtain long term portfolio protection at an affordable price.
2. Composition of the Index
The XOC is a capitalization-weighted index comprised of the 100
most highly capitalized NMS common stock issues traded through the
NASDAQ system. The XOC, which was developed by the Exchange and is
computed by Bridge Data, is comprised of stocks from approximately
thirty industry groups and responds to the general market trends of the
OTC market. The Index is updated every 15 seconds during the trading
day. Pursuant to PHLX Rule 1100A, ``Dissemination of Information,''
updated Index values are disseminated and displayed by means of the
Consolidated Last Sale Reporting System and the facilities of the
Options Price Reporting Authority (``OPRA''). The closing Index value
is published in The Wall Street Journal and other financial
publications.
3. Index Construction and Calculation
In order to keep the XOC current and representative of general
market trends in the OTC market, each January and July the Exchange
identifies and ranks the 125 most highly capitalized NMS common stock
issues. The stocks included in the 125 ranking are compared to the
issues in the Index, and issue(s) not ranked within the 100 most highly
capitalized issues are deleted from the Index and replaced by the
issue(s) which has increased in capitalization since the previous
ranking. Thus, on a semi-annual basis, the XOC is adjusted to reflect
changes in the capitalization ranking of NMS stock issues. In addition,
any time a component stock registers on a national securities exchange
or is the subject of a merger or acquisition, the stock is deleted from
the Index and replaced by the next highest capitalized issue as
identified in the most current ranking of the 125 most highly
capitalized NMS issues. The Index is adjusted to reflect stock splits
and dividends.
In computing the value of the Index, the current market value of
each component stock is multiplied by the number of outstanding shares.
The resulting market values are added together to determine the current
aggregate market value of the issues in the Index. To compute the
current Index value, the aggregate market value is divided by the base
market value and multiplied by 100. The base value is adjusted
periodically to account for changes in capitalization of any of the
component stocks resulting from mergers, acquisitions, listings, and
substitutions.
4. Contract Specifications
The proposed long-term reduced-value XOC options will trade
independently of an in addition to currently listed full-value XOC
options and will be subject to the same rules that presently govern the
trading of full-value XOC options, including sales practice rules,
margin requirements, and floor trading procedures. The strike price
intervals for the proposed options will be fixed at no less than $2.50,
and the proposed options will be aggregated with full-value XOC options
for position and exercise limit purposes.
The PHLX has determined that since positions in the full-value XOC
options and those in the proposed reduced-value long-term XOC options
are based upon the same underlying stock index, the proposed reduced-
value XOC options will be aggregated with full-value XOC options for
position and exercise limit purposes. Accordingly, the PHLX proposes to
amend PHLX Rule 1001A to state that for aggregation purposes, ten
reduced-value long-term XOC options are the equivalent of one full-
value XOC contract. Since one full-value XOC contract is equivalent to
ten reduced-value XOC contracts, each reduced-value XOC contract will
be considered one-tenth of a full-value XOC contract when the contracts
are aggregated for position and exercise limit purposes.
Thus, under the current XOC position limit of 10,000 contracts, an
option holder with no full-size XOC contracts would be permitted to
hold 100,000 reduced-value XOC contracts. Similar to full-value XOC
options, the proposed reduced-value options will feature American-style
exercise. The PHLX will continuously calculate and disseminate the
underlying index value for the proposed reduced-value XOC options in
addition to the full-value Index.
As a result of the one-tenth reduced-value feature of the proposed
options, the reduced-value XOC may vary slightly from one-tenth of the
full-value Index. In this regard, the PHLX intends to adopt the
following procedure in rounding the reduced-value Index: the PHLX will
divide the calculated value of the XOC by ten and round the resulting
quotient to the nearest one-hundredth. The digits one through four will
be rounded down to the next number and digits five through nine will be
rounded up to the next number.
Upon Commission approval of the proposal, the PHLX intends to list
initial long-term option series on the new reduced-value XOC with
December 1995 and December 1996 expirations. While the initial series
listings would have less than 36 months to expiration, thereafter, the
PHLX plans to list options with 36-month expirations at each December
expiration, resulting in the introduction of a December 1977 expiration
after the December 1994 expiration. Initially, three strike prices for
calls and puts will be listed at and surrounding the prevailing
reduced-value XOC option. However, the Exchange may list only a put or
a call if two strike prices are introduced. The Exchange also proposes
to list additional strike prices when the market reaches either the
highest or lowest existing strike price. The Exchange believes this
procedure will result in the listing of only a limited number of series
for any expiration, thereby eliminating confusion that might otherwise
be caused by a myriad of strike prices and expirations.
The Exchange expects that its proposed policy of listing strike
prices on the reduced-value XOC will permit the offering of options at
premiums between $2.00 and $7.00 ($200 to $700 per contract) based upon
current market volatility and other pricing considerations. Such
premiums appear to be in the desired range of prices that investors
have favored in trading index warrants. Such premiums could not be
achieved by using full-size XOC options without the listing of strike
prices so deeply out of the money and away from the current index value
as to offer investors limited ability to participate in the market or
protect a portfolio of primarily OTCV stocks.
The PHLX believes that the proposal is consistent with Section 6 of
the Act, in general, and in particular, with Section 6(b)(5), in that
it is designed to facilitate transactions in securities and protect
investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any 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 PHLX has requested that the proposed rule change be given
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
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).\4\ Specifically, the
Commission believes that the reduced-value long-term XOC options will
benefit investors by providing them with a valuable hedging and
investing vehicle that should reflect accurately the overall movement
of the OTC market and provide investors with additional means to hedge
portfolios against long-term market risk at a reduce cost. The
Commission believes that the lower cost of the reduced-value XOC
options should allow investors to hedge their portfolios with a smaller
outlay of capital and may facilitate investor participation in the
market for XOC options, which should, in turn, help to maintain the
depth and liquidity of the market for XOC options, thereby protecting
investors and the public interest.
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\4\15 U.S.C. 78f(b)(5) (1988).
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The Commission believes that trading in the reduced-value XOC
options will not have an adverse market impact or be susceptible to
manipulation.\5\ The Commission has determined previously that the
full-value XOC is a broad-based index\6\ and does not believe that
dividing the XOC by ten changes this determination. The reduced-value
XOC index will contain the same stocks with the same weightings as the
XOC and will be calculated in the same manner as the XOC (with the
exception of being one-tenth the value of the XOC). Accordingly, the
Commission finds that the reduced-value XOC is a broad-based index.
Moreover, the Commission believes that any potential manipulation
concerns raised by the reduced-value XOC options are minimized by the
fact that positions in the reduced-value XOC options and full-value XOC
options will be aggregated for position and exercise limit purposes.\7\
In addition, the Commission notes that the same Exchange surveillance
procedures applied to full-value XOC options will be used for the
reduced-value XOC options.\8\
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\5\The Commission notes that, prior to listing long-term
reduced-value XOC options, the PHLX will be required to provide
written representations that both the Exchange and OPRA have the
necessary systems capacity to support the new series of long-term
reduced-value XOC options.
\6\See Securities Exchange Act Release No. 33634 (February 17,
1994), 59 FR 9263 (February 25, 1994).
\7\In this regard, it is reasonable for the PHLX to count ten
reduced-value XOC option contract as equivalent to one full-value
XOC contract for position and exercise limit purposes because the
underlying value of one XOC contract is equal to the underlying
value of ten reduced-value XOC contracts.
\8\Telephone conversation between Edith Hallahan, Attorney,
PHLX, and Yvonne Fraticelli, Attorney, Options Branch, Division, on
July 6, 1994.
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Because the Exchange's existing rules applicable to stock index
options, including, among others, sales practice rules, margin
requirements, and position and exercise limits, will apply to the
reduced-value XOC options, the Commission believes that the market for
the reduced-value XOC options should be fair and orderly and does not
raise any new customer protection concerns.
The Commission finds good cause for approving the proposal and
Amendment Nos. 1 and 2 prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. In
light of the fact that the Commission has approved proposals by other
exchanges to list reduced-value options on existing indexes, and in
light of PHLX rule 1101A(b)(iii), which allows the PHLX to list series
of long term options on stock indexes, the Commission believes that the
proposal to list long term reduced-value XOC options presents no new
regulatory issues. In addition, the Commission believes that Amendment
Nos. 1 and 2 clarify and strengthen the Exchange's proposal.
Accordingly, the Commission believes that it is consistent with the Act
to approve the proposal and Amendment Nos. 1 and 2 on an accelerated
basis.
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 NW., Washington, DC 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 withheld from the public in accordance with the provisions of
5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 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-94-03 and should be
submitted by [insert date 21 days from date of publication].
It is therefore ordered, pursuant to Section 19(b)(2) of the Act\9\
that the proposed rule change (SR-PHLX-94-03) is approved.
\9\15 U.S.C. 78s(b)(2) (1982).
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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) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17761 Filed 7-20-94; 8:45 am]
BILLING CODE 8010-01-M
