[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43289-43290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21327]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37575; File No. SR-Phlx-96-18]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change to Trade a European-
style National Over-the-Counter Index Option
August 15, 1996.
On May 28, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``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 change the execution style
of the National Over-the-Counter Index (``Index'') option, from
American-style to European-style.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 37355 (June 24, 1996), 61 FR 33790 (June 28,
1996). No comments were received on the proposal.
The Exchange began trading the Index in 1985. The Index is a
capitalization-weighted market (broad-based) index composed of the 100
largest capitalized stocks trading over-the-counter. The Phlx proposes
to change the exercise style of the Index option from American-style to
European-style. Under the Exchange's rules, an American-style option is
an option contract that may be exercised at any time from the opening
of the position until its expiration, whereas a European-style option
is an option contract that can be exercised only on the day it
expires.3
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\3\ See Phlx Rules 1000(b)(34) and (35).
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The Exchange stated that it received requests to change the
expiration style of the Index from many investors who prefer to trade
index options that cannot be exercised except on the day they expire.
The Exchange notes that European-style index options have certain
advantages, including the elimination of the risk of early exercise.
According to the Exchange, investors holding spread positions in
European-style index options do not have to be concerned that one leg
of a short position will be exercised prior to expiration. Moreover,
the Exchange believes that sellers generally will benefit from the
European-style exercise feature, because absent concerns about early
exercise, they will be free to engage in long-range planning and
strategies.
The Exchange has proposed to convert the Index from American-style
to European-style exercise on a prospective basis. After Commission
approval of the Phlx proposal, the Exchange will add expiration series
with European-style exercise following the next expiration date of the
Index option. The Exchange will continue trading the American-style
option until the listed series expire or no longer have open interest.
Except during this wind-down period, the Exchange does not intend to
continue trading American-style options side-by-side with European
options on the Index.
The Exchange stated that it will provide adequate notice of the new
European-style option by way of memoranda to the Phlx membership.4
In addition, the Exchange intends to preserve the investment
community's familiarity with the symbol XOC, which the option has been
trading under since its introduction, by retaining the use of this
symbol for the new European-style options on the Index and trading the
[[Page 43290]]
existing American-style options on the Index under the symbol
XOV.5
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\4\ The Exchange already has begun the process of informing its
membership of the impending change in the exercise style of the
Index option. See Phlx Market Surveillance Release No. 249-96, dated
July 1, 1996.
\5\ The symbol for the American-style Index option was converted
from XOC to XOV effective July 8, 1996. See supra note 4.
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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, with the requirements of Section 6(b).6 In particular,
the Commission believes the proposal is consistent with the Section
6(b)(5) requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public.
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\6\ 15 U.S.C. 78f(b).
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As the Commission has stated previously,\7\ European-style options,
which can be exercised only during a specified period prior to
expiration, should facilitate transactions in index options through
lower premiums and providing certainty to market participants. Premiums
on an index option reflect the risk that a long option holder will
exercise before expiration and the option writer will be assigned.
Because this risk is not present with European-style index options,
premiums on these options may be lower, therefore making them more
attractive to investors. Moreover, European-style index options provide
the certainty that allows market participants (particularly hedgers,
spreaders, and options writers) to engage in long-range planning and
strategies. This certainty also should promote trading in index
options. By facilitating transactions in Index options in these ways,
the Commission believes that the proposal should help to increase the
depth and liquidity of the Exchange's stock index option markets.
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\7\ See, e.g., Securities Exchange Act Release Nos. 31831
(February 5, 1993), 58 FR 8436 (February 12, 1993) (order approving
change in exercise style of NYSE Composite Index options from
American-style to European-style).
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In addition, the Commission believes that the Exchange has
established reasonable procedures designed to change Index options from
American-style to European-style exercise without causing undue
investor confusion. Specifically, the Phlx plans to implement the
change in exercise style on a prospective basis by adding expiration
series with European-style exercise following the next expiration date
of the Index option. The outstanding American-style series will remain
outstanding until their expirations or no open interest in these series
exists. As noted above, the Phlx has already advised its membership of
the impending change to the European-style expiration feature for Index
options upon Commission approval of this proposal, including the phase-
in procedures, by means of a memorandum to members.\8\ The Phlx, upon
issuance of this approval order, will notify its members of the change
with the exact date when European-style Index options will be
introduced.\9\ In addition, the Phlx already has changed the symbol for
American-style Index options from XOC to XOV to avoid any
confusion.\10\
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\8\ See supra note 4.
\9\ Telephone conversation between Edith Hallahan, Special
Counsel, Phlx, and Sharon Lawson, Senior Special Counsel, SEC, dated
August 15, 1996.
\10\ See supra note 4.
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In sum, the Phlx's procedures are comparable to those approved
previously by the Commission in connection with other exchanges'
modification of the exercise feature of index options \11\ and should,
as noted above, provide benefits to investors.
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\11\ See, e.g., Securities Exchange Act Release Nos. 31831
(February 5, 1993), 58 FR 8436 (February 12, 1993) (order approving
change in exercise style of NYSE Composite Index options from
American-style to European-style); 26199 (October 19, 1988), 53 FR
43060 (October 25, 1988) (order approving change in exercise style
of Amex Major Market Index options from American-style to European-
style).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-Phlx-96-18) is approved.
\12\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21327 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M
